July 21, 2008

Judge: PPL Montana Owes State $41M

By Dennison, Mike

HELENA - PPL Montana, the state's largest electric power producer, owes the state $41 million in back rent for using state- owned riverbeds at its hydroelectric dams, a state judge has ruled.

District Judge Thomas Honzel of Helena, whose ruling was filed late Friday afternoon, said PPL should pay the state rent based on a percentage of its power sales profits going back to 2000 - a method proposed by a state-hired expert.

Honzel said the riverbeds under PPL Montana's eight hydroelectric dams in Montana have "unique characteristics which make them valuable for the production of hydropower."

The riverbeds are "directly related" to hydropower production, so using a percentage of power sales to calculate the rent is the "appropriate method" to determine fair market value for using state lands, the judge wrote.

The $41 million is rent for eight years, from 2007 back to 2000, when PPL took control of the dams after buying them from Montana Power Co. Rent for use of state lands is dedicated for funding public schools.

Attorney General Mike McGrath, whose office handled the case, said Monday the ruling is a "huge victory" for the state and the fair treatment of those using state lands.

"Everybody else that uses state lands has to pay a fee," McGrath said. "There is no reason that this business, which is extremely profitable, should be singled out not to pay the fee that every other state lands user has to pay."

PPL spokesman David Hoffman said the company is "extremely disappointed" with the decision but hasn't decided whether to appeal to the Montana Supreme Court.

He said the decision "upsets 100 years of settled property and water-rights law," and could end up affecting other water users who benefit from the flow of rivers over state-owned streambeds.

Neither PPL nor its predecessor, Montana Power Co., ever paid any rent to the state for using state-owned riverbeds at their privately owned hydroelectric projects.

"We also have more than 100 years of policy by the state to encourage the development of hydroelectric power, that provides clean, renewable power," Hoffman said. "This decision certainly isn't an incentive to create or expand hydroelectric power."

Friday's ruling is in a case that began with a 2004 lawsuit filed in federal court by private attorneys in Bozeman and Helena, who said PPL and other hydroelectric dam owners had been violating the state constitution by failing to pay rent for use of the state- owned riverbeds of any navigable stream.

The state eventually became a party in the case and took it over, winning decisions in federal and state court.

Honzel ruled Friday that the Federal Power Act does not pre-empt state law on the question of the state's property rights. He then largely adopted the rent calculation method proposed by University of Montana economics professor John Duffield.

Duffield used a method known as "shared net benefits," which grants a percentage of a project's profits to the owner of property leased for the project.

In this case, Duffield calculated the value of the power produced by PPL's dams and subtracted the cost of producing that power, to come up with a net benefit.

He then determined the percentage of the project acreage owned by the state and allocated that percentage of "net benefits" to the state.

Duffield said PPL made $40 million on power sales from the Thompson Falls dam on the Clark Fork River, from 2000 to 2007. The state owns slightly more than 27 percent of the project, so its share for those years is about $10.9 million.

PPL's earnings from its eight dams along the Madison and Missouri rivers totaled $122 million for those same years. The state's ownership of each project area varies, but its total rent amount should be a shade more than $30 million, Duffield said.

The state Land Board would determine future annual rents for use of the riverbeds, Honzel said.

The dams include the Madison Dam on the Madison River, near Ennis, and Hauser, Holter, Black Eagle, Rainbow, Cochrane, Ryan and Morony dams on the Missouri, near Great Falls and Helena

An expert hired by PPL Montana said the company's state lease payments should be based on a per-acre charge for the land flooded by the dams. The Federal Energy Regulatory Commission uses this method to charge PPL and other hydroelectric-project owners for flooded federal lands.

The PPL expert said the company's total lease payments for 2007 should be $210,500, or one-thirtieth of what Duffield said the rent should be.

Honzel said the FERC method "does not take into consideration the economic value those lands contribute to the production of power. Furthermore, using that schedule simply does not establish the full- market value required by the Montana Constitution."

Montana last fall settled the case with Avista Corp., a Spokane, Wash.-based company that owns Noxon Dam on the Clark River in northwestern Montana. Avista agreed to pay $4 million a year in rent from 2007-2016. The state also agreed to a much smaller settlement with PacifiCorp, which owns a small hydroelectric project on the Swan River near Bigfork.

McGrath said the state tried to negotiate a settlement with PPL, but the parties couldn't agree.

Copyright Billings Gazette Jun 17, 2008

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