Willman v. Washington Utilities & Transp.

• Court: Washington Supreme Court
• Writing for the Court: C. Johnson
• Citation: Willman v. Washington Utilities & Transp., 117 P.3d 343, 154 Wn.2d 801 (Wash. 2005)
• Decision Date: 11 August 2005
• Docket Number: No. 75821-2.
• Parties: Elaine WILLMAN and Citizens Standup! Committee, Petitioners, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Cascade Natural Gas Corporation, and Pacificorp, d/b/a Pacific Power and Light Company, Respondents.

Page 343

117 P.3d 343

154 Wn.2d 801

Elaine WILLMAN and Citizens Standup! Committee, Petitioners, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Cascade Natural Gas Corporation, and Pacificorp, d/b/a Pacific Power and Light Company, Respondents.

No. 75821-2.

Supreme Court of Washington, En Banc.

Argued June 23, 2005.

Decided August 11, 2005.

Eric Estes Richter, Seattle, for Petitioners.

Mary Eileen Crego, Louis David Peterson, John Lynn West, Hills Clark Martin & Peterson PS, Michael Patrick O'Connell, Jill Diane Bowman, James M. Van Nostrand, Stoel Rives LLP, Seattle, Scott J. Kaplan, Stoel Rives LLP, Portland, OR, Robert Daniel Cedarbaum, Office of Atty. Gen., Olympia, for Respondents.

Robert Kirk Costello, Olympia, Simon J. Ffitch, Office of Atty. Gen., Seattle, for Amicus Curiae (Public Counsel Section of Atty. Gen.).

C. JOHNSON, J.

¶ 1 This case involves whether the Washington Utilities and Transportation Commission (WUTC) properly allowed utilities to take costs imposed upon them by the Yakama Indian Nation (Nation) and pass them on to the bills of all customers, including non-Indian residents, living within the Yakama reservation.

FACTS

¶ 2 In 2002, the Nation passed an ordinance¹ requiring all utilities operating within the external boundaries of its reservation to pay a fee equal to three percent of the utility's gross operating revenue within the reservation. The ordinance also requires that the utilities enter into franchise agreements with the Nation, whereby certain administrative, licensure, and legal standards must be met. Clerk's Papers (CP) at 11.

¶ 3 Cascade Natural Gas Corporation and PacifiCorp (which operates as Pacific Power and Light Company) provide utility services to the Yakama reservation and are subject to the three percent charge. In response, they filed tariff revisions with the WUTC in an effort to pass on these costs to all customers within the Yakama reservation, including nonmembers of the Nation. If a charge is considered a tax, the utility may recover the cost by passing it on to rate paying customers in that jurisdiction. On the other hand, if the charge is considered a franchise fee, it is an operating expense that can be recovered only by increasing costs systemwide. See State ex rel. Pac. T. & T. Co. v. Dep't of Pub. Serv., 19 Wash.2d 200, 277-81, 142 P.2d 498 (1943).

¶ 4 The WUTC staff concluded that the costs imposed by the Nation were not franchise fees but essentially a business and occupation tax on the utilities. Accordingly, the staff recommended that the WUTC follow the precedent of similar utility tax extractions by the Lummi and Swinomish reservations and allow the costs to be passed on to all customers living within the reservation. Brannon v. Qwest Corp., WUTC Docket Nos. UT-010988, TG-010989, UE-010990, UE-010995, UT-010966, TG-011084 (Jan. 11, 2002).

¶ 5 The WUTC held open hearings on the matter and ultimately followed the advice of its staff, finding that the cost incurred by the utilities was a tax and the tax was presumed valid since no federal case law clearly invalidated it. The WUTC then spread the tax burden to all customers within the reservation, stating that it would amend its decision if a federal court later determined that such imposition on nonmembers was contrary to federal law. CP at 209.

¶ 6 Nonmembers challenged this decision. Petitioners Elaine Willman, a non-Indian who lives on fee land within the reservation, and the Citizens Stand Up! Committee argue that the WUTC acted unlawfully since it distributed an invalid tax. At most, they argue the cost incurred by the utilities should be considered a general operating expense, as a franchise fee, not a tax, thereby having the cost distributed among all ratepayers served by the utilities statewide, not just those within the reservation. They claim that the decisions by the WUTC are discriminating against them as nonmembers of the Nation.

¶ 7 Petitioners filed this action in Yakima County Superior Court, naming the WUTC, Cascade, and PacifiCorp as defendants. The utilities argued that the claim should be dismissed by summary judgment, in part because petitioners failed to join the Nation as an indispensable party to the action. The superior court dismissed the petition and denied all parties' motions, thereby also holding that the Nation was not an indispensable party to the action. Petitioners appealed to Division Three of the Court of Appeals, which affirmed the superior court. Elaine Willman and the Citizens Stand Up! Committee then petitioned this court for review. We affirm the Court of Appeals.

DISCUSSION

¶ 8 WUTC regulates the utility services of Cascade and PacifiCorp in the state, including services within Indian reservations. Utilities are entitled to rates that are "just, fair, reasonable and sufficient." RCW 80.28.010(1). The WUTC, as an administrative agency, must perform its duties as proscribed by law. RCW 34.05.570(4)(b). In this case, these duties include deciding whether the utility expenses were prudent and whether the expenses were valid taxes that could be passed on to reservation customers.

¶ 9 A petitioner may challenge an agency's decision only if such a decision is (1) unconstitutional, (2) outside the statutory or legal authority of the agency, (3) arbitrary or capricious, or (4) taken by persons not authorized to take the action. RCW 34.05.570(4)(c). The petitioners in this case argue that the WUTC's decision to pass on the utility costs to all ratepayers within the reservation was "arbitrary and capricious." This court has found that an action is arbitrary or capricious only if it "is willful and unreasoning and taken without regard to the attending facts or circumstances." Hillis v. Dep't of Ecology, 131 Wash.2d 373, 383, 932 P.2d 139 (1997).

Tax Invalidity Claim

¶ 10 Petitioners' main argument is that the WUTC unlawfully allowed the utilities to pass the Nation's tax on to their utility bills. The WUTC regulates utilities to ensure they only incur prudent expenses. Valid taxes imposed upon and paid by utilities are viewed as prudent expenses. See State ex rel. City of Seattle v. Dep't of Pub. Utils., 33 Wash.2d 896, 902, 207 P.2d 712 (1949); see also King County Water Dist. No. 75 v. City of Seattle, 89 Wash.2d 890, 897-98, 577 P.2d 567 (1978). Further, unlike other business expenses, valid jurisdictional taxes may be passed directly to utility ratepayers within that jurisdiction. To be successful in their claim, petitioners must show that the WUTC acted in an arbitrary or capricious manner when it decided that the taxes were presumptively valid.

¶ 11 Determining the validity of an Indian law tax involves complex issues of federal law. Since such analysis is outside the expertise and normal review of the WUTC, it has adopted a standard that presumes validity unless clearly shown to the contrary by federal law. Thus, the WUTC considers a tax a prudent expense unless the tax is "clearly invalid."

¶ 12 The petitioners in this case challenge this validity standard and argue in the alternative that the WUTC should presume invalidity when applying taxes to nontribal members. They base this assumption on a United States Supreme Court case, which held generally that tribes may not regulate or tax nonmembers. Montana v. United States, 450 U.S. 544, 563-67, 101 S.Ct. 1245, 67 L.Ed.2d 493, (1981). A later case held that taxes by an Indian government on nonmembers within the reservation are "presumptively invalid." Atkinson Trading Co. v. Shirley, 532 U.S. 645, 659, 121 S.Ct. 1825, 149 L.Ed.2d 889, (2001). Petitioners contend that in practicality, unless this presumption of invalidity is used by the WUTC, it will be difficult for nonmember ratepayers within a reservation to challenge a tax imposed upon them by a government they do not elect.

¶ 13 The WUTC and utilities argue that to follow the petitioners' reasoning would require the WUTC and the state courts to analyze the complexities of federal Indian tax law for every case. The application of Indian tax law on nonmembers is far from clearly decided in most cases. The Montana rule has exceptions, which allow Indian governments to tax nonmembers for conduct based on a consensual relationship between the tribe and the nonmember or based on actions that affect "the political integrity, the economic security, or the health or welfare of the tribe." Montana, 450 U.S. at 566, 101 S.Ct. 1245. The extent of these exceptions continues to be debated by the federal courts. See Burlington N. Santa Fe R.R. Co. v. Assiniboine & Sioux Tribes, 323 F.3d 767, 775 (9th Cir.2003); see also Big Horn County Elec. Coop., Inc. v. Adams, 219 F.3d 944, 950-51 (9th Cir.2000). This case is no different. In fact, a large portion of both parties' briefing and argument in this case debates the current status of federal law in this arena. Further muddying the analysis, the tax is being imposed by the tribes against the utilities, not the ratepayers directly.

¶ 14 We agree with the WUTC that instead of diving into the complexity of federal Indian law tax analysis, the WUTC and this court must primarily apply Washington State law, thereby requiring utilities to pay only prudent expenses. The WUTC did not act in an arbitrary or capricious manner in determining the tax was valid and thus a prudent expense. The WUTC's use of this standard and presumption of tax validity was not "willful and unreasoning and taken without regard to the attending facts or circumstances." Hillis, 131 Wash.2d at 383, 932 P.2d 139. By keeping indepth federal Indian law analysis in the federal courts, the role of state administrative agencies is more clearly delineated.

¶ 15 Thus, for the purposes of Indian law taxation of utilities, a tax that is not "clearly invalid" is a prudent expense. This presumptive validity test still would allow for the petitioners to obtain a federal court disposition in their favor, thereby showing the tax is "clearly...