20071101Application.pdf

Avista Corp.
1411 East Mission P.O. Box 3727
Spokane. Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
RECEIVE
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Corp.
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October 31 , 2007
Ms. Jean D. Jewell
Commission Secretary
Idaho Public Utilities Commission
472 W. Washington
Boise, ill 83702-5983
Re:Case No. A VU-07-
Application of A vista Corporation for an Order Authorizing Deferral
of Settlement Lease Payments
Dear Ms. Jewell:
Enclosed is A vista s Application for an Order Authorizing Deferral of Settlement Lease Payments.
The deferred accounting request pertains to costs to be incurred as a result of the recent settlement of
a lawsuit in the State of Montana over use of the riverbed resulting from the Company s ownership
ofthe Noxon Rapids and Cabinet Gorge hydroelectric projects located on the Clark Fork River. The
filing consists of an original and seven copies of Avista s Application.
Please direct any questions regarding this filing to Ron McKenzie at [phone].
Sincerely,
~. ~'"
Kelly Norwood
Vice President, State and Federal Regulation
Enclosure
See attached service list
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that I have served Avista Corporation s Application for an Order
Authorizing Deferral of Settlement Lease Payments by mailing a copy thereof, postage
prepaid to the following:
Ms. Jean D. Jewell
Commission Secretary
Idaho Public Utilities Commission
472 W. Washington
Boise , 1083720-5983
Scott Woodbury
Deputy Attorney
Idaho Public Utilities Commission
472 W. Washington
Boise , ID 83702-0074
Pamela Mull
Vice President & General Counsel
Potlatch Corporation
601 Riverside Ave., Suite 1100
Spokane, WA 99201
Dated at Spokane , Washington this 31 st day of October 2007.
t1L--
Rates Coordinator
Kelly O. Norwood
Vice President
State and Federal Regulation
A vista Corporation
1411 E. Mission Avenue
P. O. Box 3727
Spokane, Washington 99220
Phone: [phone], Fax: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MA TIER OF THE APPLICA nON
OF A VISTA CORP. dba A VISTA UTILITIES
FOR AN ORDER AUTHORIZING DEFERRAL
OF SETTLEMENT LEASE PAYMENTS
Case No. A VU-07-
APPLICATION OF AVISTA
CORPORATION
I. INTRODUCTION
Avista Corporation, doing business as Avista Utilities (hereinafter Avista or
Company), at 14l1 East Mission Avenue, Spokane, Washington, pursuant to Section 61-524
Idaho Code and Rule 52 of the Idaho Public Utilities Commission ("Commission Rules of
Procedure ), hereby applies to the Commission for an order regarding the deferral of costs
be incurred as a result of the recent settlement of a lawsuit in the State of Montana over use
ofthe riverbed resulting from the Company s ownership of the Noxon Rapids and Cabinet
Gorge hydroelectric projects located on the Clark Fork River. Pursuant to Commission Rule
of Procedure 201 , the Company requests that this filing be processed under the
Commission s modified procedure rules.
Avista is a utility that provides service to approximately 346 000 electric customers
and 211 000 natural gas customers in a 26 000-square-mile area in eastern Washington and
northern Idaho. Avista Utilities also serves 94 000 natural gas customers in Oregon. The
APPLICATION OF AVISTA CORP.Page 1 of 6
largest community served in the area is Spokane, Washington, which is the location ofthe
corporate headquarters.
Communications in reference to this Application should be addressed to:
Kelly O. Norwood
Vice President
State and Federal Regulation
A vista Corporation
1411 E. Mission Avenue
Spokane, Washington 99220
Phone: [phone]
Fax: [phone]
E-mail: kell y.norwood(a),avi stacorp. com
David 1. Meyer, Esq.
Vice President and Chief Counsel of
Regulatory and Governmental Affairs
A vista Corporation
1411 E. Mission Avenue
Spokane, Washington 99220
Phone: [phone]
Fax: [phone]
E-mail: david.meyer~avistacorp.com
II. BACKGROUND
In October 2003, a lawsuit was originally filed against private owners ofhydroelectric
dams in Montana, including A vista. In this lawsuit, the State of Montana alleged that the
hydroelectric facilities are located on State-owned riverbeds and the owners ofthe dams have
never paid lease payments to the State for occupying such lands. The lawsuit requested lease
payments prospectively and also requested damages for trespassing and unjust enrichment for
periods of time dating back to the construction ofthe respective dams in the 1950s. Attached
to this Application is a detailed narrative describing the history of the litigation and the
nature of the claims. (See Appendix 1)
The Montana State Court previously ruled on several pre-trial motions for summary
judgment, finding that, as a matter oflaw, the Clark Fork River was navigable and the State
of Montana owns the riverbeds , that such lands are school trust fund lands, and therefore, the
statutes of limitations have not run on the State of Montana' s claims for prior damages. This
left only the issue of damages to be decided at time oftrial, set for October 22 2007, with the
State asserting $200 million owing by A vista for prior trespass since the dams were
APPLICATION OF AVISTA CORP.Page 2 of 6
constructed, and $8.4 million owing prospectively, on an annual basis.
On October 19 2007, the Company reached a settlement with the State of Montana
resolving this matter. (See Appendix 2
, "
Memorandum of Negotiated Settlement Terms
Pursuant to the settlement, A vista has agreed to make lease payments in the initial amount of
$4 million per year beginning February 1 , 2008, for the calendar year 2007 , and continuing
through calendar year 2016 , adjusted each year by the Consumer Price Index (CPI), with
payment for prior damage claims.
The level of the payments , the start date of the payments, as well as other terms and
conditions of settlement, were all integral to the resolution of these claims. Because of the
State s insistence on an initial payment in February 2008 for the year 2007, it is necessary to
have deferred accounting to address recovery of these costs.
On or before June 30, 2016, A vista and the State of Montana will determine whether
the annual lease payments remain consistent with the principles oflaw as applied to the facts
and negotiate an adjusted lease payment for the remaining term of Avista s Federal Energy
Regulatory Commission license for its hydroelectric facilities on the Clark Fork River, which
expires in 2046. If A vista and the State of Montana do not agree on an adjusted lease
payment, the parties will engage in advisory arbitration and submit the arbitrator
recommendation to the State Board of Land Commissioners ("Land Board") for approval.
The settlement also contains provisions that could reduce the amount of Avista s lease
payments as a result of future judicial determinations in related cases or governmental
actions. As mentioned, Avista will not make any lease payments for periods prior to 2007.
A vista Corp. and the State of Montana will request a consent decree from the
Montana State Court adopting the terms of the settlement, as well as final approval by the
APPLICATION OF AVISTA CORP.Page 3 of 6
State s Land Board.
In this filing, the Company is requesting an order allowing for the deferral of the lease
payments. In the Company s next general rate case it would address the prudence and
recovery of the settlement lease payments , and propose an appropriate amortization period
for future recovery of the deferred costs. The negotiated settlement avoids the potential of
costly litigation and exposure to very substantial claims by the State of Montana. The Noxon
Rapids and Cabinet Gorge hydroelectric projects are the Company s lowest-cost resources
and are integral to the Company s resource base. The Company continues to make every
effort to preserve the generation from these projects for the benefit of its customers at the
lowest possible cost. The proposed accounting treatment would provide the Company with
the opportunity to recover the costs associated with owning and operating these projects
while customers receive the benefit from these low-cost resources.
III. PROPOSED ACCOUNTING TREATMENT
The Company requests authority to defer the lease payments in Account 186 -
Miscellaneous Deferred Debits. The lease payments would be allocated to the Washington
and Idaho jurisdictions based on the Production/Transmission allocation in effect at the time
that the deferrals are made and placed in separate Washington and Idaho 186-accounts.
Interest would accrue on the Idaho share of the deferrals at the customer deposit rate. In the
Company s next general rate case, the Company would propose the recovery of an
amortization of deferred lease payments and accrued interest that would be deferred prior to
the effective date of rates established in the next general rate case. The amortization period
would begin with the effective date ofthe new rates established in the next general rate case.
In that rate case, the Company would also address recovery of the ongoing lease payments.
APPLICATION OF A VISTA CORP.Page 4 of 6
IV. REQUEST FOR RELIEF
WHEREFORE, A vista respectfully requests that the Commission issue an Order
allowing the deferral of the Montana lease payments. The prudence and recovery of the
costs, and recovery of the amortization of deferred costs, which would commence with the
effective date of the new rates, would be addressed in the Company s next general rate case
proceeding as described herein. The Company requests that the Order be issued by January
, 2008 , to facilitate the year-end closing of the Company s accounting records.
The Company requests that the matter be processed under the Commission
Modified Procedure rules through the use of written comments.
Dated at Spokane, Washington this 31 sl day of October 2007.
AVISTA CORPORATION
t2, J~
Kelly O. orwood
Vice President
State and Federal Regulation
APPLICATION OF A VISTA CORP.Page 5 of 6
VERIFICATION
STATE OF WASHINGTON)
County of Spokane
Kelly O. Norwood, being first duly sworn on oath, deposes and says: That he is
the Vice President of State and Federal Regulation of A vista Utilities and makes this
verification for and on behalf of A vista Corporation, being thereto duly authorized;
That he has read the foregoing filing, knows the contents thereof, and believes the
same to be true.
74 o ,JVt
SIGNED AND SWORN to before me this 31 sl day of October 2007, by Kelly O.
Norwood.
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APPLICATION OF A VISTA CORP.Page 6 of 6
APPENDIX 1
BACKGROUND OF SETTLEMENT OF CLAIMS
BETWEEN AVISTACORPORATION AND
STATE OF MONTANA
(10/31/07)
Introduction,
Avista Corporation s federally licensed Clark Fork Project is located on the Clark Fork
River, a tributary of the Columbia River. The Clark Fork Project includes the 527 megawatt
Noxon Rapids dam and reservoir located in Montana and the 261 megawatt Cabinet Gorge Dam
located in Idaho near the Montana-Idaho border. The reservoir for the Cabinet Gorge Dam is
located almost entirely in Montana.
In October 2003 , Richard Dolan and Denise Haymen, residents of Bozeman, Montana
with children in Montana s public school system, filed an action in U.S. District Court in
Missoula, Montana against Avista Corporation ("Avista ), PPL Montana, LLC
, ("
PPL
Montana ) and PacifiCorp (collectively "Hydroelectric Owners ). Shortly thereafter, Dolan and
Haymen were joined by school districts from Great Falls, Montana, which sought to intervene as
additional party plaintiffs.! Together, the Private Plaintiffs alleged that the State s riverbeds are
being utilized by the Hydroelectric Owners, that those riverbeds are "School Trust Lands" under
the Montana Constitution, and that compensation is owed by the Hydroelectric Owners to the
State on account of their use and occupancy of State lands.
In March 2004, the State of Montana, through the Attorney General, intervened as a party
plaintiff in the action. Ultimately, however, the Federal District Court dismissed the lawsuit
I Dolan, Haymen and the Great Falls School Districts are collectively referred to herein as the "Private Plaintffs,
concluding that the Private Plaintiffs lacked standing and that the Court did not possess
jurisdiction over the matter.
In November 2004, the Hydroelectric Owners filed a declaratory judgment action in
Montana District Court in Helena, Montana. In response, the State filed an Answer
Counterclaims and a Motion for Summary Judgment. Because it represented a case of first
impression in Montana and the United States, the litigation resulted in briefing and rulings on
numerous issues of Constitutional and statutory significance. It further resulted in three major
court hearings, consisting of multiple hours of oral arguments before the Montana District Court;
extensive discovery, including the exchange ofthousands of pages of written documents; and the
depositions of 35 party representatives, experts and related witnesses.
In June 2006, PacifiCorp and the State entered into a voluntary settlement, and
PacifiCorp was subsequently dismissed from the lawsuit. On October 19, 2007-just three days
prior to trial and with the State s damage claim still pending, A vista and the State also entered
into a voluntary settlement. Trial of the State s claims against PPL Montana began on October
, 2007. Those proceedings are ongoing as of this date.
Nature of the Lawsuit,
The claims of the Private Plaintiffs, subsequently echoed by the Montana Attorney
General's pleadings in both federal and state court, are summarized, in pertinent part, as follows:
The beds of navigable waters within Montana s borders became the property of
the State under the "Equal Footing " doctrine of the United States Constitution.
That doctrine provides that, upon their entry to statehood, the states assumed
ownership of the lands beneath navigable waters on an equal footing with the
thirteen original states.
Under the Montana Constitution, the lands beneath navigable waters within the
State are "School Trust Lands." Under Montana law, the State has a fiduciary
obligation to collect full market value for the use of such lands on behalf of the
Montana School Trust.
In 1931 Montana enacted the Montana Hydroelectric Resources Act, which
requires a license or lease for the occupancy of State-owned lands. Although
never before interpreted or applied to the Hydroelectric Owners' facilities in
Montana, the Act requires those intending to use state-owned lands to apply for a
lease and pay full market rental for such use.
The rental obligations of the Hydroelectric Owners began when they constructed
the hydroelectric projects at issue. Therefore, damages owed to the State go back
to the original construction of the projects, without regard to any statute of
limitations that might otherwise apply.
Avista has wrongfully occupied the Clark Fork River through its operation of the
Noxon Rapids Dam and Reservoir, which are wholly located in the State of
Montana. Likewise, although the Cabinet Gorge Dam is located in Idaho, most of
the Cabinet Gorge Reservoir is located in Montana and, as a consequence, its
operation by A vista also results in the wrongful occupation of State-owned lands
As applied to A vista, the State is entitled to past damages from 1954 to the
present, together with future rents at the full market rental value ofthe land.
Potential Exposure
The State of Montana employed Dr. John Duffield, a professor at the University of
Montana who is well-known for his expertise in the calculation of natural resource damages, as
its expert economist. Dr. Duffield employed a "shared net benefits" methodology to measure the
purported damages owed to the State by virtue of the Hydroelectric Owners' occupancy of State-
owned lands. Previously, the shared net benefits methodology had been applied only by the
Federal Energy Regulatory Commission and federal courts in determining the amount of annual
charges to be paid to Indian Tribes under Section 10(e) of the Federal Power Act. Only the State
of Maine had applied the methodology in a case not involving tribal lands.
Prior to Dr. Duffield's June 2007 report, the precise magnitude of the State s damage
claim was not fully known. In his report, however, Dr. Duffield asserted that, based upon the
State s claimed ownership of all lands beneath the navigable waters at issue, A vista owed the
Although discovery had been conducted regarding the Cabinet Gorge Dam, the facility was not official1y
incorporated into the case until the State sought to amend its Counterclaim to conform the evidence on the eve
trial.
State in excess of $542 000 000 for cumulative past rents, and in excess of $24 000 000 for
current 2006 rent, with annual rental payments to continue, as adjusted, for the remaining term
of Avista s FERC license (i., until 2046).
The initial litigation position of the State concerning damages was revised after the
District Court granted A vista and PPL Montana s motion that certain submerged land under the
reservoirs was not owned by the State, and that only the original streambeds were at issue. The
revised litigation position of the State, as filed with the District Court on October 15, 2007, was
that the full market value rental due on Avista s Clark Fork Project was $200 374 752 for past
occupation, together with future rents of $8,416 510 per year starting in 2006, to be adjusted
annually by the Consumer Price Index with a recalculation of the original base amount every 10
years according to the shared net benefits methodology.
As the Counterclaim Defendant, A vista asserted that the State had the burden of proving
its ownership of the lands at issue, the precise acreage of those lands, and the proper measure of
damages. In addition, A vista was prepared to offer into evidence the testimony of Dr. Thomas
Zepp, an economist from Salem, Oregon with extensive knowledge and experience in utility
economics and regulation, as well as the shared net benefits methodology.Dr. Zepp was
prepared to testify that Dr. Duffield's methodology resulted in a substantial overstatement of
potential rents owed by Avista. Additionally, Avista was prepared to introduce testimony from
Bruce M. Jolicoeur, MAl, a certified land appraiser in the States of Montana, Idaho and
Washington, that the appropriate method of valuing riverbed lands is by reference to adjoining
riparian lands.
For its part, PPL Montana employed Dr. Gary Saleba, another regionally known expert
on utility economics, as its principal damages witness. His conclusions, although somewhat
different in method, were expected to be very similar to the conclusions of Dr. Zepp and Mr.
Jolicoeur.
Litigation Summary
The initial claims filed by the Private Plaintiffs were subsequently adopted by the State
Attorney General and, as discussed below, were later reinforced by the rulings of the Montana
District Court.
To defend the action, A vista retained, as joint counsel, the law firms of Paine Hamblen
LLP of Spokane, Washington--a firm with extensive history representing both publicly and
privately owned utilities, including in cases involving the shared net benefits methodology; and
Garlington, Lohn & Robinson, PLLP of Missoula, Montana--a respected and long-established
Montana law firm. PPL Montana and PacifiCorp, respectively, retained K&L Gates of Seattle
and Stoel Rives LLP of Seattle as their primary counsel, as well as Montana-based counsel.
In response to the Complaint of the Private Plaintiffs, and similarly in response to the
state court Complaint of the State of Montana, Avista initially moved the Federal Court to
dismiss the action on the grounds that federal law preempts Montana law to the extent that the
latter requires payment of rents by federally licensed Hydroelectric Owners. Additionally, Avista
moved to dismiss the Private Plaintiffs for lack of standing. PPL Montana and PacifiCorp filed
similar motions.
The Federal District Court ruled against the Hydroelectric Owners on the issue of federal
preemption, but granted their motions to dismiss the Private Plaintiffs for lack of standing.
Subsequently, the Hydroelectric Owners filed motions to dismiss the federal court action on the
grounds that the Court lost jurisdiction of the matter when it dismissed the Private Plaintiffs. In
response, the Federal Court dismissed the lawsuit and vacated its prior rulings.
Thereafter, in November 2004, the Hydroelectric Owners initiated a declaratory judgment
action in Montana State District Court in Helena, Montana. In response, the State filed an
Answer, Counterclaim and a Motion for Summary Judgment. Likewise, Avista, PPL Montana
and PacifiCorp filed various motions asserting, among other things, the defenses of federal
preemption, prescriptive easement, estoppel, laches, statute of limitations, waiver and breach of
agreement. These motions were heard by the Montana District Court on June 28, 2005, at which
time they were taken under advisement. In April 2006, the District Court ruled that (a) neither
the Federal Power Act nor the Federal Navigation Servitude facially preempted the State from
obtaining rental compensation under the Montana Hydroelectric Resources Act; and (b) that the
Hydroelectric Owners' equitable defenses were unavailable against the State. In addition, the
Court rejected Avista s attempts to assert the Clark Fork Settlement Agreement (an agreement
involving Montana, Idaho and other stakeholders in the relicensing of Avista s Clark Fork
Project) as a defense to the State s Counterclaim. The Court did, however, allow Avista to
challenge the navigability ofthe Clark Fork River (later ruling, however, that it was navigable).
Following these decisions, the District Court established a procedural schedule for
discovery, disclosure of expert reports and filing of dispositive motions. Trial was originally
scheduled to begin, without a jury, on October 15, 2007. Between 2006 and 2007, the parties
exchanged thousands of pages of documents in discovery, prepared and exchanged detailed
expert reports and conducted 35 depositions of party representatives, experts and other witnesses.
In late 2006, a second series of motions for summary judgment and motions to exclude
evidence were filed by the parties. In total, the parties filed over 1 300 pages of briefs, not
including exhibits, on the many legal issues raised by the proceedings. In September and
October, 2007, the Montana District Court issued orders on pending motions. Among other
things, the District Court made the following determinations as a matter of law:
The Clark Fork River is navigable for purposes of establishing the State s claim to
title;
The State owns the beds of the Clark Fork River and may charge rent to
Hydroelectric Owners for their use;
Riverbed lands are School Trust Lands;
There are no statutes of limitation or equitable defenses that limit the State
claims with respect to School Trust Lands and, as a consequence, the State may
seek damages back to the original construction of the dams at issue;
Because the lands in question are School Trust Lands, rents are owed by
Hydroelectric Owners under the Montana Hydroelectric Resources Act for their
use and occupancy;
Water rights held by the Hydroelectric Owners do not preclude the State from
seeking damages and rents;
The State is not precluded from presenting evidence of its damages based upon a
shared net benefits" theory; and
The State s damage claim is not limited to the physical footprint of the dam itself
but may extend to include the use of upstream riverbeds owned by the State.
The District Court also ruled that State s ownership interest extends only to the riverbed
lands before the dams were built, and does not extend to lands that were subsequently inundated
as a result of the Hydroelectric Owners' projects. This ruling was significant, as it diminished the
potential recovery of the State by nearly two-thirds. Nonetheless, as a result of the District
Court's other rulings, the State was granted the right to seek damages from Avista back to 1954.
A vista and PPL Montana sought interlocutory review of the District Court's rulings by
the Montana Supreme Court. With one dissent, the Montana Supreme Court declined to exercise
interlocutory jurisdiction, meaning that the parties would be forced to wait until a final judgment
was entered before seeking appellate review of the District Court's rulings.
3 Although the Court had earlier addressed the statute of limitations as a defense, it had not considered Avista
additional argument that the Montana Code ~ 27-318, limits a party's relief for certain claims to five years.
Significantly, the Court's subsequent decision on this issue against the Company (thereby exposing the Company to
damages back to 1954) was received just hours after the settlement between Avista and the State was reached,
received earlier, it may have impacted the State s willingness to waive all of its claim for past damages.
As a result of the District Court's rulings in September and October 2007, the following
issues remained to be determined at trial:
The acreage of the State-owned lands at issue;
The appropriate method for determining prospective rentals and retroactive
damages; and
The amount of such rentals and damages.
As stated before, the State s trial position, as set forth in the Pretrial Order entered with
the Court, was that Avista owed $200 374,752 in damages accruing back to 1954, and
$8,416,510 on an annual basis going forward, adjusted annually by the Consumer Price Index.
Settlement Discussions and Mediation.
Beginning in late 2006, A vista initiated a series of informal settlement discussions with
the State . In furtherance of those efforts, on September 6 and 7, 2007, a mediation was
conducted in Helena, Montana by Jack Mudd, a respected former Dean of the University
Montana Law School. At that time, however, Avista and the State were unable to bridge the gap
between the State s expected level of damages and Avista s settlement position. Informal
discussions continued, and on October 17, 2007, representatives of Avista and the State met in
Helena for a final effort, on the eve of trial, to arrive at a mutual settlement. This final round of
negotiations resulted in a tentative settlement that was subsequently memorialized in a
Memorandum of Negotiated Settlement Terms dated October 19, 2007. A copy of that
Memorandum is attached to the Petition as Appendix 2.
Terms of Settlement,
For purposes of settlement, Avista has agreed to pay rent to the State each year
beginning in the calendar year 2007 , in the amount of $4 000 000 per year. These rental
4 PacifiCorp settled with the State in June, 2007. The amount of the settlement in annual rentals is between $50 000
and $60 000, which reflects the very small size ofthe PacifiCorp project at issue (only 4 Mws.
payments are to be made in arrears, with payment due on or before each February 1 for the
previous calendar year. Rent will be adjusted each year by the Consumer Price Index (CPI)
annual average for the calendar year for which payment is due. The State has agreed that the
payment of such rent represents the full market value of Avista s use ofthe Clark Fork River. No
later than June 30 , 2016, Avista and the State will meet and confer to review the terms of the
lease for the balance of the term of A vista s license, with advisory arbitration in the event of
disagreement. As part of the settlement, the State has also agreed to waive its claim to past
damages of $200 374,752 in its entirety.
The parties have also agreed to jointly move the District Court to enter the terms of the
Memorandum of Negotiated Settlement Terms as part of a final judgment in a Consent Decree.
Favorable Aspects of the Memorandum of Ne2otiated Settlement Terms
The negotiated terms ofthe parties' settlement presents a favorable resolution to A vista of
hotly contested matters, particularly taking into account the primary elements of the settlement.
These include the following:
The negotiated annual rent on a prospective basis represents only 48% of
the State s litigation position, as set forth in the Pretrial Order ($8.4
million). Significantly, the State will also not receive any retroactive or
historical damages, notwithstanding the Montana District Court's rulings
that would have allowed evidence of such damages (the state was claiming
$200 million).
Assuming that PPL Montana, which remains in the case, achieves a more
favorable outcome at trial or through settlement, A vista will receive the
benefit of that outcome. In particular, if the aggregate annual rent
determined by settlement or litigation for PPL Montana is less than 48%
of the base year rent claimed from PPL Montana by the State in its case-
in-chief, Avista s aggregate annual rent will be decreased proportionally.
If subsequent governmental action within Montana results in a rental
payment more favorable to A vista than the rent calculated under the
Memorandum of Negotiated Settlement Terms the rent paid by A vista will
be modified to incorporate the more favorable terms.
, during the term of A vista s FERC license, a court determines that i) the
Clark Fork River is not navigable for title purposes, ii) the shared net
benefits method is not a lawful method of calculating the full market value
of land interests, or iii) no compensation or reduced compensation in the
nature of rentals is owed to Montana for occupancy of State-owned
riverbeds, and the application of such determination or determinations
would result in a rental payment more favorable to A vista, or otherwise
extinguish Avista s obligation of pay rentals, Avista s obligation to pay
rent will be modified.
By virtue of these provisions, the Memorandum of Negotiated Settlement Terms insures
to A vista and its customers the up-side benefits of any subsequent governmental actions or
judicial determinations in Montana. Although these types of re-openers or off-ramps are
uncommon in litigation, it is a fair accommodation to the interests of A vista and its customers in
this case.
Finally, it should be remembered that the Montana Supreme Court is the author of the
cases upon which the State s School Trust Land rental obligation is predicated. Moreover, any
appeal from an unfavorable ruling by the Montana Supreme Court would have to be taken to the
United States Supreme Court, which accepts review in only a small percentage of cases
submitted to it, and which may be reluctant to interfere with the Montana Supreme Court'
interpretation of its own state laws. Therefore, considering the risks of continued litigation
together with the limited potential for a successful appeal, the settlement reflects a reasonable
compromise, and a fair accommodation to the interests of A vista and its customers.
APPEND
. Memorandum of Negotiated Settlement Terms
October 19,2007
This memorandum outlines the key terms of the agreement in principle reached
between A vista Corporation and the State of Montana to resolve all issues pending
between them in Cause No, CDV 2004-846, Mont. First Judicial District Court, Lewis &
Clark County,
1. Rent. For purposes of settlement Avista agrees to pay rent to the State
each year begjnning calendar year 2007, and continuing through the rema;n;ng term of
Avista's FERC license for the Clark Fork Project. Avista acknowledges that the State
owns 3 158 acres of riverbed within the Clark Fork Project. The State acknowledges that
the rent represents the full market value of the State interest or estate being used by
Avista in connection with its operation of the Clark Fork Project(which includes both the
Noxon Rapids project, and that portion of the Cabinet Gorge project within Montana),
Rent will be paid in arrears, with payment due on or before each February 1 for the
previous calendar year, The initial amount of the rent will be $4 million per year, The
rent will be adjusted each year as follows:a, Beginning with calendar year 2008, and continuing through
calendar year 2016, the base amount of $4 million per year shall be adjusted
upward by the Consumer Price Index (CPI) annual average for the calendar year
for which payment is due,
b, Not later than June 30, 2016, the parties will meet and confer to
determine whether the annual rental remains consistent with the principles of law
as applied to the facts, In the event either party believes the annual rental no
longer is consistent with applicable: law applied to the facts, the parties will
negotiate in good faith to determin~ an appropriate adjusted rental rate, If the
parties do not agree upon an adj~ rental rate by September 30 2016, the
parties will engage in advisory arbitration and submit the arbitrator
recommendation to the State Board of Land Commissioners ("Land Board") for
approval,
2. Lease Terms. The parties agree to jointly recommend to the Land Board
a lease of a power site pursuant to the proViisions of the Hydroelectric Resources Act,
Mont. Code Ann, ~~ 77-4-201, et seq, As part ofiliat recommendation, the State and
A vista agree to stipulate that the rent agreed upon by the parties represents full market
value for the lease of3,158 acres of Clark Fork riverbed being used by Avista in
connection with the Clark Fork Project. The duration of the lease will be not less than the
remaining tenn of Avista's FERC license.
, 3. Most Favored Natio.s Clause. If co-party PPL Montana, LLC, either by
litigation through judgment and any appeals, or through settlement, receives a
determination that the full market value of its land interests at issue in the litigation is
based upon factors more favorable to it than those contained in the settlement with .
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A vista, the A vista rent will be adjusted by an amount necessary to reflect the more
favorable determination, For purposes of this clause, a more favorable determination will
occur if~e aggregate annual rent determined by settlement or litigation for PPL Montana
Detennined PPL Rent") is less than 48% oftbe aggregate amount of base year rent
Claimed PPL Rent") claimed by the State in its case in chief at trial, If this occurs, the
$4 million base rent to be paid by A vista shall be reduced retroactively starting on the
date of final judgment on the PPL Montana claims or settlement by a perce~tage equal to
the Determined PPL Rent divided by the Claimed PPL Rent. See Attachment A fot an
illustration of the calculation,
- 4. . Reopener for Subsequent Governmental Action. If, during the term of
the A vista lease, the Land Board, the Montana Legislature, the Department ofN atural
Resources and Conseryation. or any other State entity with jurisdiction, enacts or adopts a
rental statute, rule, or policy applicable to leases issued under the Hydroelectric
Resources Act that wouid result in a rent payment more favorable to A vista than the rent
calculated under paragraph I, the rent paid by Avista shall be modified retroactively
starting on the date of enactment or adoption to incorporate the more favorable terms,
s~ Reopener for Subsequent Judicial Determination. If, during the tenD
of the Avista lease, the reach of the Clark Fork River within the boundaries of Avista'
FERC license is determined by a court of competent jurisdiction to be not ~vigable for
title purposes, Avista's obligation to pay rent shall cease, If, during the term of the
Avista lease, a court of competent jurisdiction determines that (a) the shared net benefits
method is not a lawful method to calculate the full market value ofland interests; or (b)
no compensation or reduced compensation in the nature of rentals is owed to the State of
Montana for occupancy of state-owned riverbeds, and the application of such
determination or determinations would result in a rent payment more favorable to A vista
than the rent calculated under paragraph I, or otherwise extinguish Avista's obligation to
pay rentals, Avista's obligation to pay rent win be modified retroactively starting on the
date of determination to reflect a method of calculating rent that is cons~stent with the
court determination or determinations, or.Avista's obligation to pay rent shall cease,
accordingly,
6. Consent Decree. The parties will agree on the form for, and jointly move
the entry as a fmaljudgment of, a consent decree that: (a) incorporates the terms of this
Memorandum; (b) contains full releases of AviSta and the State for all matters at issue in
the. litigation; (c) allows for appropriate public notice and comment; (d) certifies that
Avista is in full compliance with the terms of the Hydroelectric Resources Act; and (e)
includes appropriate other te~ such as dispute resolution, force majeure and so forth,
STATE OF MONTANA
By:
It. /J
~~
AssT. A.
Date: (X,Ir. " I 1.401
VISTA CORPORATION
~V-Q.".#'ole if."', v. P. ,.'t:!:I
Date: 119/07 .J..;I;:;~~
. .-.------------- ---..... -.'.--,... . . ." ,_.,..
AITACHMENT A
If the Determined PPL Rent is less than 48% of the Claimed PPL Rent, A vista annual
rent shall be recalculated according to following formula:
Annual Recalculated A vista Rental = A x CD + C) Where:
A = $8,416,510 (Amount of annual rent claimed by the State in the
State's Contention 9.A of the Pretrial Order)
D = Determined PPL Rent
C = Claimed PPL Rent set fortl;1 in State's case in chief
As an illustration, if Determined PPL Rent ~ $3,000,000, and the Claimed PPL Rent is
57,252,804, the Annual A vista Rcntal wo~ be calculated as follows:
Amlual Recalculated Avista Rental: $3,4U,347 = $8,416,510 x ($3,000,000
+$7,252,804)
. '