U.S. v. Basin Electric Power Cooperative

• Decision Date: 18 October 2000
• Docket Number: Nos. 99-3122,99-3216,PLAINTIFFS-APPELLEES,PLAINTIFF-APPELLANT,DEFENDANT-APPELLANT,PLAINTIFF-APPELLAN,UNITED,99-3450,s. 99-3122,99-3216
• Parties: (8th Cir. 2001) UNITED STATES OF AMERICA; UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK,, v. BASIN ELECTRIC POWER COOPERATIVE, UNITED STATES OF AMERICA, PLAINTIFF, UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK,, v. BASIN ELECTRIC POWER COOPERATIVE, UNITED STATES OF AMERICA,, UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK, PLAINTIFF, v. BSIN ELECTRIC POWER COOPERATIVE, Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 781

248 F.3d 781 (8th Cir. 2001)

UNITED STATES OF AMERICA; UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK, PLAINTIFFS-APPELLEES, v. BASIN ELECTRIC POWER COOPERATIVE, DEFENDANT-APPELLANT.

UNITED STATES OF AMERICA, PLAINTIFF, UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK, PLAINTIFF-APPELLANT, v. BASIN ELECTRIC POWER COOPERATIVE, DEFENDANT-APPELLANT.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLANT, UNITED STATES OF AMERICA, EX REL ROBERT J. NORBECK, PLAINTIFF, v. BSIN ELECTRIC POWER COOPERATIVE, DEFENDANT-APPELLANT.

Nos. 99-3122,99-3216, 99-3450

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: October 18, 2000

Filed: April 30, 2001

As amended May 15, 2001

Appeals from the United States District Court for the District of North Dakota. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Wollman, Chief Judge, Lay and Beam, Circuit Judges.

Lay, Circuit Judge.

PART I. INTRODUCTION

Basin Electric Power Cooperative ("Basin"), located in North Dakota, was organized to build power plants and provide power for its members. In the late 1970s and early 1980s, Basin constructed the Antelope Valley Station ("AVS facility") in North Dakota, which is the subject of this litigation. The AVS facility includes three separate parts: two power stations ("AVS I" and "AVS II"), and a set of common facilities designed to provide service to both AVS I and AVS II.

This litigation stems from a contract (the "Basin-WAPA contract") between Basin and Western Area Power Administration ("WAPA") ¹ . During the course of building the AVS facility, Basin realized that the AVS facility would generate more power than its members demanded, so Basin needed to sell this excess power to keep the price of power from the AVS facility at a reasonable rate. At the same time, WAPA needed extra power to meet the demands of its customers. In 1982, WAPA contracted to buy 185 mega-watts ("MW") of the 450 MW capacity of AVS II. When the parties executed the contract, they could not accurately predict the price of power for the life of the contract. Accordingly, they agreed that WAPA's price would be based on the cost of power production. The contract provided that WAPA would pay 185/450th, or forty-one percent, of the cost of producing power at AVS II.

The methodology Basin used for determining the cost of AVS II power was set out in Exhibit A of the contract. Exhibit A listed a series of fixed and variable or energy related costs associated with producing power at the AVS facility, such as interest on debt, operation costs, steam expenses, and maintenance costs. The Rural Utilities Service ("RUS") promulgated the Rural Utilities Service System of Accounts ("RUS System") upon which these cost categories were based. ² The RUS System incorporates Generally Accepted Accounting Principles ("GAAP"), a series of general principles followed by accountants. Included in GAAP are the Financial Accounting Standards ("FAS") published by the Financial Accounting Standards Board ("FASB").

However, before WAPA began purchasing power from AVS II, Basin sold AVS II to a consortium of corporate investors for a total of $622,875,000, and leased it back, paying a monthly lease cost instead of interest cost on AVS II debt. Consequently, the Basin-WAPA contract was modified to reflect that WAPA's cost of power would include a pro rata share of lease costs, rather than interest costs, for AVS II.

The contract was executed in 1982 and ran from 1985 to 1990 without any apparent problems. In 1992, Robert Norbeck ("Norbeck"), who worked as Basin's chief auditor during the Basin-WAPA contract, faced the prospect of losing his job. He sent a "whistle blower" letter to Basin's management, threatening to reveal several of Basin's allegedly fraudulent transactions unless he kept his job. Undeterred by the letter, Basin fired Norbeck, ³ who responded by bringing a qui tam action under the False Claims Act. ⁴ See 31 U.S.C. 3729-3733. The Government eventually intervened, although it pursued only contract claims, as opposed to claims under the False Claims Act, against Basin. Norbeck, as the Relator, then pursued the false claims abandoned by the Government.

Broadly stated, the parties bring four issues on appeal. First, Basin appeals the district court's finding that Basin violated the False Claims Act with regard to the manner in which it accounted and billed for the sale/leaseback of AVS II. Second, Basin appeals the district court's finding that Basin breached the Basin-WAPA contract by choosing a ten-year amortization period for the common facilities. Next, on cross-appeal, Norbeck claims the district court erred when it found that Basin did not breach the Basin-WAPA contract by including post-construction imputed interest as a cost of power charged to WAPA. Finally, the Government cross-appeals the district court's finding that Basin's calculation and billing for coal costs did not constitute a breach of contract. We discuss these issues seriatim.

PART II. OVERCHARGE OF $15.5 MILLION VS. $2.4 MILLION

A. Background

Initially, Basin challenges the district court's finding that Basin overcharged WAPA due to Basin's sale and leaseback of AVS II. Although Basin admits some overcharge occurred and returned approximately $2.4 million to WAPA before trial, the district court found that the total amount of Basin's overcharge was approximately $15.5 million. In accord with this decision, the district court awarded WAPA slightly over $13 million ($15.5 million minus $2.4 million) in contract damages. The district court further found that Basin submitted these overcharges to WAPA in violation of the False Claims Act and multiplied the contract damages as provided for in the Act for a total judgment of $35.95 million. On appeal, Basin asks that we reverse the district court's award, arguing that Norbeck ⁵ introduced no evidence to support the district court's judgment. We agree, and we reverse the district court's award of $13 million in contract damages, as well as the award of multiplied damages under the False Claims Act.

Like most large power facilities, the AVS facility was financed on debt. Under the original Basin-WAPA contract, WAPA's costs included a share of interest payments on AVS II. WAPA's costs also included a share of the interest from the common facilities. Since only a portion of the common facilities served AVS II, only a portion of common facilities' interest was allocated to AVS II, and only a pro rata share of that was passed on to WAPA.

After the formation of the original Basin-WAPA contract, Basin's new general manager discovered that it was in serious financial straits. To raise money to pay off debt, Basin sold AVS II to an outside group of investors and then leased it back, retaining full control over the operations of AVS II, but now paying a monthly lease. Since the original agreement made WAPA responsible for a share of AVS II interest, and the sale/leaseback of AVS II eliminated AVS II debt, Basin and WAPA altered their original agreement. Under the new agreement, WAPA became responsible for a share of AVS II lease payments in lieu of AVS II interest payments. The common facilities were not a part of the sale/leaseback of AVS II, so this amendment to the Basin-WAPA contract did not affect WAPA's responsibility for its share of common facilities' interest.

Basin, however, did not apply all of the money it received from the sale of AVS II to AVS project debt. Approximately $99.5 million went to pay off higher interest debt from other projects. WAPA's agreement to pay a share of AVS II lease costs as a substitute for AVS II interest costs meant that WAPA should not have been responsible for any interest from the unretired $99.5 million. Both parties agree that WAPA was charged for some of the interest from the $99.5 million. They disagree, however, on the amount of the overcharge.

To understand Basin's explanation for the overcharge on interest from the $99.5 million in unretired debt, a brief examination of Basin's accounting procedures is necessary. Basin did not keep separate pools of debt for each of the AVS facilities. Instead, all AVS debt was kept in a single pool. Since the cost of power from AVS I and AVS II included interest on debt from the facility providing the power, as well as a portion of the interest from the common facilities, Basin needed to allocate the interest from this pooled debt to each of the AVS facilities. The interest was allocated based upon each facilities' proportionate net investment value (cost).

After the sale/leaseback transaction, WAPA was no longer responsible for any interest charges from AVS II, including interest from the $99.5 million in unretired AVS II debt. According to Basin, it eliminated AVS II interest as a cost category to WAPA, but properly continued to charge WAPA for its share of the common facilities' interest. The $99.5 million was still in the pooled AVS debt, however, and interest from the $99.5 million still accrued. When Basin allocated the pooled interest to AVS I and the common facilities (AVS II having been eliminated because of the sale/leaseback), a part of the interest from the $99.5 million was allocated to the common facilities. Then, once the common facilities' interest was allocated to AVS I and AVS II for the purposes of determining the cost of power, a portion of the interest from the unretired $99.5 million was allocated to AVS II. Thus, when Basin billed WAPA for common facilities' interest, the bill included a small portion of the interest from the unretired $99.5 million, for which Basin admits WAPA should not have been responsible.

Apparently no one complained about this overcharge during the contract period, and it was only when Norbeck threatened to "blow the whistle" on several of Basin's transactions that Basin took action. ⁶ After receiving Norbeck's "whistle...