DD 11/2/07 Agency contributes cost of utility extension, but gets no credit for that if it later condemns the facility.

Daily Development for Friday, November 2, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu

EMINENT DOMAIN; CONDEMNATION; PUBLIC UTILITIES, RATE-MAKING:  School District that condemns water company property may not deduct the amount of a prior “contribution in aid of construction” paid by the District from the condemnation award as this would result in an unconstitutional taking of property without just compensation.

Bd. of Educ., Moriarty Mun. Sch. Dist. v. Thunder Mountain Water Co., 2007-NMSC-031, 141 N.M. 824, 161 P.3d 869 (6/1/07), (the lower court opinion that this case affirms, 145 P.3d 92, was the DIRT DD for 1/30/07)

In 1999, when the School District was constructing a middle school and wished to obtain water for consumptive use and fire protection at the school, it entered into a Construction Contract and Water Service Agreement  with the Water Company to obtain water service. Apparently such a contribution was required in order to induce the Water Company to provide such service.  The agreement by which the contribution was made was unclear as to whether the facilities thus developed belonged to the Water Company or the District, but the court here concluded that they were the Company’s even though they could not be included in the Company’s rate base (since built with contributed funds).  The School District paid the Water Company over $60,000 for installing the water line extension as a CIAC charge.

 In 2002, the School District terminated the Agreement and, later, filed its petition for eminent domain to condemn the water line extension and associated property pursuant to New Mexico law. The School District asserted it was entitled to deduct the CIAC charge from the compensation due to the Water Company. It was stipulated that the value of the facilities was equal to the amount of the CIAC.  So the District, under its argument, would have obtained ownership of the facilities at no further cost.  The trial court disagreed with the District and granted summary judgment in favor of the Water Company. The School District appealed to the New Mexico Court of Appeals, which affirmed.

The Court of Appeals relied upon condemnation cases and principles, as opposed to rate-making cases and principles, to answer the question presented before it. The Court of Appeals concluded that the School District exercised its right to acquire the water line extension belonging to the Water Company by eminent domain and that, therefore, the Water Company was constitutionally entitled to just compensation, which included “the fair market value of the property on the date of the taking.”

The Court of Appeals also held that “[c]ondemnation cases teach that property contributed to the utility by a CIAC is not excluded from just compensation”. The Court of Appeals continued its analysis by interpreting, and even relying upon, cases from other states, recognizing that the CIAC is a separate act from the condemnation. Ultimately, the Court of Appeals concluded that deducting the CIAC payment from the condemnation award would unconstitutionally deprive the Water Company of its property without just compensation. The School District appealed to the New Mexico Supreme Court, which affirmed the Court of Appeals.

The Supreme Court concluded that eminent domain principles required the School District to pay the Water Company the FMV of the disputed property because the Water Company had a fundamental right, under both the federal and New Mexico Constitutions, protecting its property from a taking without just compensation. The CIAC paid to the Water Company and the FMV to be paid to the Water Company were two distinct recoveries, separated by three years. The CIAC was mandated by the Public Regulation Commission, while the FMV was mandated as a matter of constitutional law when the School District elected to initiate a condemnation action. Therefore, just compensation was not a double recovery.

Comment 1: As the editor commented in the earlier DD, this is one for the precedent files.  The court cites parallel authority in Maine, Maryland and Florida. 

Comment 2:   Can the problem be avoided by state legislatures by providing that facilities constructed by utilities for public agencies with agency donated funds will belong to the public agency from the outset?  There is nothing in the opinion to dispute this.  The issue may in fact simply arise from the technical differences between rate schedules and eminent domain proceedings, and not from any profound notion of the proper role of such contribution agreements. 

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