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In re Validity of the Power Sales Agreement

July 8, 2010

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.



Appeal from the District Court of the Seventh Judicial District, State of Idaho, Bonneville County. Hon. Darren B. Simpson, District Judge.

The opinion of the court was delivered by: Burdick, Justice

2010 Opinion No. 84

District court decision on power sales agreement, reversed.

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.*fn1 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.*fn2

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"*fn3 and "Block"*fn4 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.*fn5 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,*fn6 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, ยง 3 of the Idaho ...


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