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HomeMy WebLinkAboutPublicly Owned Electric System & Bulk Power Supply including Fishers Island Jan 1986LEGAL REPORT Respecting the Feasibility of Establishing a Publicly-Owned Electric System and Securing a Bulk Power Supply in the Town of' Southold, New York including Fishers Island Prepared by Law Offices Duncan, Weinberg & Miller, P.C. Suite 1200 1775 Pennsylvania Avenue, N.W. Washington, D.C. 20006 January 1986 suite 800 i615 m STREET~ N.W. WASHINGTON D.C 20036 January 31, 1986 Mr. Frank Murphy Supervisor Town of Southold Main Road Southold, New York 11971 Dear Mr. Murphy: We are pleased to transmit herewith twenty copies of the Legal Report Respecting the Feasibility of Establishing a Publicly-Owned Electric System and Securing a Bulk Power Supply in the Town of Southold, New York including Fishers Island as prepared by Duncan, Weinberg & Miller, P.C. We have also drafted four alternative versions of legislation for consideration by the Town Board. We have not bound the draft legislation with the study since the legislation will undoubtedly undergo numerous changes before any is adopted by the Town Board. We would urge you to submit the draft legislation to both the Southold Town Attorney and the Town's bond counsel before the legislation is presented to the Town Board for formal consideration. We would be pleased to work with the Town Attorney and bond counsel to ensure that the legislation ultimately adopted is legally sound and meets the objectives and purposes of the Town. I believe the Report addresses the major issues which were identified in our proposal to conduct the study as accepted by the Southold Town Board on November 21, 1985. As I have previously explained, we are submitting the Legal Study approximately one month later than we had anticipated in our proposal. The reason for this is twofold: first, the disruption of our office operation occasioned by the recent relocation of our offices, and secondly, certain recent developments, including rulings in pending litigation and political and policy developments which have a bearing on the - 2 question of bulk power supply. We felt that these developments should be included in the study. that you, Southold needs. We have enjoyed conducting the Legal Study and we hope the Town Board and the constituency of the Town of find the Legal Report helpful and responsive to your We do want to acknowledge the assistance of Robert Taylor and Greg Magarie of R.W. Beck and Associates who provided technical advice and materials and reviewed our Legal Report in final draft. We wish you and the Town Board well in your review and assessment of the question of public ownership of the electric distribution system in the Town of Southold. We hope that we will have occasion to work with you and the Town Board on this important and timely project. Sincerely, -Wallace L. Duncan Enclosures WLD:kdt TABLE OF CONTENTS Page INTRODUCTION ............................................. 1 SUMMARY OF CONCLUSIONS ................................... 2 I. OVERVIEW OF THE ALTERNATIVE STRUCTURES FOR THE TOWN OF SOUTHOLD'S MUNICIPAL POWER SYSTEM .... ~.. 6 A. Establishment of a Municipal System Under S 360 .................................... 6 B. Other Structures for the Creation of a Utility System ............................... 7 1. Rural Electric Cooperative ................ 7 2. Not-for-Profit Corporation (Other than Rural Electric Cooperative) .......... 10 3. Public Power District or Authority ........ 12 II. ~HE FOUR ALTERNATIVE STRUCTURES PROPOSED FOR SOUTHOLD'S MUNICIPAL POWER SYSTEM ................... 15 A. Town Municipal System, Excluding the Village's Service Territory ............................... 15 1. Procedure for Establishing a Municipal System ......................... 15 2. Acquisition of LILCO's Distribution System ..................................... 17 3. Other Acquisition Issues ................... 28 a. Consequential or Severance Damages .... 28 b. Ownership and Liability Upon Abandonment of the Project ........... 32 4. Principles of Valuation ................... 41 5. Methods of Financing ...................... 48 a. Procedures for Issuance of Bonds ..... 48 i De b. Types of Financing Available ......... c. Constitutional Debt Limitation ....... Operation of the Muncipal Electric Department ................................ Town Municipal System with Contracted-for Operation by the Village of Greenport .......... Procedure for Establishing System and Approving Contract ........................ Acquisition of LILCO's Distribution System, and Financing for the Project ..... Operation of the Municipal Electric Department ................................ Advantages and Disadvantages of this Alternative Structure ............. ·own Municipal System, Merged with the Greenport Electric System ...................... Establishment of a Joint System After the Acquisition by Southold of LILCO's Distribution System ....................... Establishment of a Joint System Prior to the Acquisition by Both the Town and the village of LILCO's Distribution System ........................ Advantages and Disadvantages to the Town and the Village of this Alternative Structure ..................... a. Southold .............................. b. Greenport ............................ Expansion of Greenport's Electric System to the Boundaries of the Town .................. Procedures and Problems for the Expansion of Greenport's System ........... 2. Financing Issues .......................... 50 53 54 57 57 62 62 64 66 66 70 78 78 79 80 80 83 ii 3. Advantages and Disadvantages of this Alternative Structure ................ a. Southold ............................. b. Greenport ............................ III. FISHERS ISLAND ...................................... A. Background ..................................... B. Projected Value of FIEC Facilities ............. C. Organization Structure ......................... 1. Locally Controlled Investor-owned Utility ................................... 2. Independent Municipal Utility ............. 3. Extension of Existing Municipal Utility... a. Groton, Connecticut ................... b. Greenport, New York ................... c. Extension of Southold Distribution System to Include Fishers Island Facilities ............................ 4. Bulk Power Supply and Transmission Considerations Respecting Fishers Island .................................... a. Bulk Power Supply .................... b. Transmission (Wheeling) .............. IV. BULK POWER SUPPLY OPPORTUNITIES ..................... A. Power Authority of the State of New York ....... 1. Niagara Project Power ..................... 2. St. Lawrence Project Power ................ 3. FitzPatrick Project Power ................. B. Other Potential Sources ........................ 84 84 85 85 86 88 89 89 90 91 91 93 94 97 97 98 102 103 103 113 114 115 iii V. RIGHT TO OBTAIN WHEELING ............................ VI. JURISDICTION OF REGULATORY AGENCIES OVER THE MUNICIPALLY-OWNED UTILITY ....................... A. Federal Jurisdiction ........................... B. State Jurisdiction ............................. 1. Retail Rates .............................. 2. Environmental Impact Statement ............ VII. CONCLUSION .......................................... 116 120 120 123 123 127 129 INTRODUCTION Electric consumers in the Town of Southold, New York, are in the process of studying and analyzing means of obtaining retail electric service in their area alternative to that pro- vided by the Long Island Lighting Company ("LILCO"). As part of that process, the law firm of Duncan, Weinberg & Miller, P.C., has been authorized to prepare a feasibility report analyzing the legal issues involved in forming a publicly-owned electric dis- tribution system and obtaining a bulk power supply. The contem- plated project could be undertaken and conducted either indepen- dently by the Town of Southold, New York, by the Town through a contractual arrangement with the Village of Greenport, New York, or by the Village of Greenport on behalf of the Town. The Town Board has also requested that we examine the feasibility and alternatives for the establishment of a publicly- owned electric distribution system on Fishers Island which, although part of the Town of Southold, is geographically and physically remote from the Town proper. In light of the special circumstances whiclh appertain to providing electric utility service on Fishers Island, the feasibility and alternatives for the establishment of a publicly-owned electric system on the Island are examined separately in Section III of this Report. Pursuant to that authorization, Duncan, Weinberg & Miller has prepared the following report, which analyzes the fundamental legal issues involved in the establishment of each of four alternative kinds of municipal electric utility system. The analysis contained herein includes discussion of the legal - 2 - authority of the Town or Village to establish a municipal electric system, the procedures to acquire the facilities necessary to operate the system, the methods of determining the value of the facilities, the means of obtaining bulk power supplies (including the right to obtain wheeling), subsequent governmental regulation, and the financing of the project. To the sophisticated reader, some of the analysis may appear basic, if not obvious. This report is intended, however, to provide, to the maximum extent possible, all of the ~nforma- tion which may be desired by decision-makers evaluating their alternatives, as well as by the electric consumers who comprise the general public and electorate of the Town of Southold. SUMMARY OF CONCLUSIONS 1. The Town of Southold, New York, is authorized by New York State law to establish and operate an electric utility system within or without its territorial borders. In order to do so, the local governing body must enact a resolution, ordinance or local law, which would then be subject to a mandatory refer- endum. The Town is also authorized by New York State law to contract with the Village of Greenport, New York, to operate a Although Section II.A.5 of this Report deals with financing, the analysis contained therein should be considered merely a brief overview of the New York Local Finance Law as it per- tains to the establishment and acquisition of a municipal utility system. Duncan, Weinberg & Miller does not specia- lize in municipal financing law and does not provide service as bond counsel. Thus, the information contained herein is provided, not as a substitute for a detailed opinion of bond counsel, but rather, in order to complete the picture of issues that must be considered. - 3 - system established by the Town or to otherwise operate a system jointly with the Village. 2. The Town or Village may acquire the existkng electric distribution system either by negotiating a voluntary purchase and sale with LILCO or by exercising the power of eminent domain. Assuming that resort to eminent domain authority is necessary, the municipal government must conduct a hearing and ~ake findings with respect to the public benefits and effect of the project. It must also offer LILCO, as compensation, an amount which it deems to be just compensation, which in no event shall be less than the municipality's highest approved apprai- sal. LILCO is authorized to seek a judicial declaration of the value of its property. 3. There is no single theory by which the courts in the State of New York determine the value of utility property in eminent domain proceedings. In the past, at least four theories have been considered: Original Cost Less Depreciation, Repro- duction Cost New Less Depreciation, Capitalization of Earnings, and Fair Market Value. Compensation for the taking of LILCO's property may also include an award for going concern value, and ~or consequential or severance damages. 4. There are several potential sources of bulk power to supply the needs of the Town and its residents. The Power Authority of the State of New York ("PASNY") is required by federal and state law to give preference in the sale of power from the Niagara and St. Lawrence Hydroelectric Projects to publicly-owned and operated utilities. Depending on the outcome of pending litigation, that power may or may not be available. Alternatively, the Town may contract to purchase power from the Massachusetts Municipal Wholesale Electric Company ("MMWEC"), which is a publicly-owned system, or from any of the investor- owned utilities serving New York or its neighboring states, various regional power pools, or publicly-owned systems in Canada. More innovative power supply alternatives include the joint development, with other publicly-owned systems, of generating facilities, and the purchase of electricity from co- generation or small hydroelectric facilities. Although PASNY is responsible for providing for the transmission of Niagara Project power to its municipal customers, the Town would be responsible for securing arrangements for the transmission of power from any other source. Assuming that voluntary arrangements could not be secured, the federal. antitrust laws should provide a means of obtaining necessary transmission services. 5. Because municipal utilities are exempt from the requirements of the Federal Power Act, the scope of regulation by the Federal Energy Regulatory Commission ("FERC") over the muni- cipal utility's wholesale transactions depends on whether the facilities and services of the other party to the transaction are subject to FERC regulation. Thus, transactions with PASNY, MMWEC, or a publicly-owned Canadian utility would not be subject to normal FERC regulation. Any transactions with investor-owned utilities or regional power pools, however, would be subject to the full panoply of FERC regulation over rates for the price of such power and the terms and conditions of service. With respect to the rate at which it resells power to consumers, the Town would be subject to regulation by the New York Public Service Commission. The sole exception to that authority is with regard to the resale of PASNY power, over which PASNY maintains exclusive regulatory authority. 6. In order to finance the municipalization project, the Town is authorized to utilize tax revenues or to issue bonds. The discussion of financing alternatives contained in this report is presented with the caveat that the law firm of Duncan, Weinberg & Miller does not serve as bond counsel, and that a complete analysis of financing matters must be obtained from qualified bond counsel. The report does, however, contain a brief overview of the procedures necessary to issue bonds, which include the adoption of a resolution that is then subject to a referendum. Municipalities in New York State may issue either general obligation bonds, which are secured in the first instance by the full faith and credit of the municipal taxing authority, or so-called "double-barrel" bonds, which provide that bond- holders look first to the revenues from the project financed, before they may satisfy authority. The Town is tation on the amount of the debt out of the municipal taxing also subject to a constitutional limi- its debt, which is seven percent (7%) of the average full valuation of its taxable real estate. The State Comptroller has discretion to grant an exemption from this limita- tion where, as in this case, the debt should be self-liquidating. - 6 - I. Overview of the Alternative Structures for the Town of Southold's Municipal Power System. The General Municipal Law of the State of New York authorizes municipal corporations to operate electric utility systems, within or without their territorial limits, for the purpose of furnishing electric service to themselves or their inhabitants. See N.Y. General Municipal Law ~ 360(2) (McKinney 1974) (hereinafter.N.Y. Gen. Mun. Law); Boonville v. Maltbie, 156 Misc. 6, 281 N.Y.S. 787 (1935). Municipal corporations are defined to include any county, city, town or village. See N.Y. Gen. Mun. Law ~ 360(1). A. The Establishment of a Municipal System Under § 360. There are four alternatives available to the Town in structuring a municipal utility system. The first is to create a municipal system to be owned and operated by the Town which would extend to the geographical limits of the Town, but which would exclude the Village of Greenport's existing electric distribution system and the area Greenport serves in School District No. 10. The second option is similar to the first, differing only in that the Town would contract with Greenport for Greenport's Electric Department to manage the system established and owned by the Town. The third alternative is comprised of a joint utility established by the Town of Southold and the Village of Greenport, in which the Village of Greenport would agree to merge its elec- tric system, either before or after the acquisition of LILCO's distribution system, with the newly created system in the Town of Southold. - 7 Finally, the Town could establish a municipal system indirectly through the action of Greenport rather than $outhold. The Village, with Southold's consent, could acquire the facili- ties now owned by LILCO within its existing municipal system. Greenport would result. the Town's boundaries and enlarge A single system managed by While we have included this and the third alternative as options, there are difficulties and disabilities for both parties associated with each. Moreover, it is difficult to ascertain whether Greenport would be willing to undertake this project in the first instance. B. Other Structures for the Creation of a Utility System. Pursuant to our proposal for this study, we have also examined other possible methods and structures for the estab- lishment of a municipal system. We have found each wanting. 1. Rural Electric Cooperative. Under New York law, a Rural Electric Cooperative may not be formed except in "rural areas". A rural area is defined to be "any area of the state not included within the boundaries of any city or village having a population in excess of one thousand inhabitants". § 2(c) (McKinney 1948) does not include Towns N.Y. Rural Electric Cooperative Law (hereinafter N.Y. RECL). While the law in its limitations, it can be expected that the Town of Southold, which has a population of more than one thousand inhabitants, would be challenged if it asserted that it was a "rural area". More importantly, the powers of a REC are limited in areas significant to this project. While a REC does have some power of eminent domain, it is limited to the powers which may be exercised by other electric utility corporations for the con- struction or operation of electric transmission and distribution lines or systems. N.Y. RECL ~ 14(k). The power of eminent do- main of gas and electric corporations is limited to the acquisi- tion of "such real estate as may be necessary for its corporate purposes and the right of way through any property. " N.Y. Transportation Corporations Law S ll(3-a) (McKinney 1943 and Supp. 1984-85) (hereinafter N.Y. Trans. Corp. Law). It appears, therefore, that a REC cannot condemn facilities, but only real property necessary to construct or extend existing facilities. And while a REC is empowered to issue bonds and notes, to borrow money, and in theory to obtain loans from the federal govern- ment's Rural Electrification Administration, we are convinced that the purposes for which funds would be borrowed or raised would be subject to attack by LILCO in the courts, because of a recent interpretation of a further limitation in the N.Y. Rural Electric Cooperative Law. Section 14(d) of that statute provides: a cooperative shall not distribute, sell, supply, or dispose of electric energy to any premises or building receiving and using central station electric service or entitled to receive such service . on the effective date of this chapter if no co-operative service is available to such premises or building at the time of such installation, without the consent of the person, corporation, or municipality sup- plying . such central station electric service. - 9 - N.Y. RECL ~ 14(d). Since LILCO is supplying central station service, the Cooperative would be prohibited (absent a total acquisition, which it cannot effect) from serving LILCO's customers. A recent ruling of the New York Supreme Court, Appellate Division, seems to support this view. In New York State Electric & Gas Corporation v. Steuben Rural Electric Cooperative~ Inc., Docket No. 1048 (Dec. 20, 1985), the court held that the Steuben REC could not serve a new delivery point where it was part o~ the same "premises" already being served by the private utility. Its reasoning, the court held, was Id. [c]onsistent with the public policy underlying the Rural Electric Cooperative Law and with the particular purposes of section 14(d) of avoiding duplication of services and of protecting private utilities from the loss of their existing customers or of potential customers to whom they would reasonably and in the ordinary course be expected to furnish service. Under New York law, therefore, we conclude that the Town of Southold would not be able to successfully establish a utility system for the Town which could acquire the facilities of LILCD within the Town's borders through the creation of a rural electric cooperative. An exception to the foregoing conclusion may be applicable in the case of establishing a public utility system on Fishers Island. As discussed in Section III of this report, a rural electric cooperative may be an appropriate and desirable vehicle through which to establish a public-owned electric distribution system as an alternative to either municipal - l0 - ownership or the continuation of ownership and operatiol] by the Fishers Island Electric Company. 2. Not-for-Profit Corporation (Other Than Rural Electric Cooperative). While the New York Not-for-Profit Corporation Law (McKinney 1970) (hereinafter N.Y. N-PCL) permits the formation of not-for-profit corporations "for any lawful business purpose to achieve a lawful public or quasi-public objective", N.Y. N-PCL ~ 201(b), this arrangement is not an appropriate means of estab- lishing the Town's proposed utility system, for various reasons. First, an opinion issued by the New York Attorney General states that a not-for-profit corporation cannot be formed for the pur- pose of owning, maintaining, improving, and operating utility systems, including electric, for the benefit of owners of indi- vidual housing units formerly united as a community. The ration- ale for this decision was that such purposes are essentially of a business nature, and entirely foreign to those of a membership corporation. Op. Atty. Gen. 183 (1951). Moreover, pursuant to article VIII, section 1 of the New York State Constitution, no town can give or loan any money or property to, or become directly or indirectly the owner of stock in, or bonds of, any private corporation. Nor can any town give or loan its credit to, or in aid of, any public or private corporation or association. Any corporation created by Southold to acquire LILCO's facilities and establish a municipal utility therefore could not be identified with the Town financially, and could not rely on - 11 - the full faith and credit of the Town in order to finance the condemnation of LILCO's system. The proposed not-for-profit corporation would have no assets and would be ineligible for tax- exempt financing. Although a not-for-profit corporation could issue notes, bonds~, and other obligations (other than revenue bonds), see N.Y. N-PCL S 202(a) (9), it is difficult to see how, without assets, the corporation could obtain the financing necessary to acquire LILCO's system. There are further potential difficulties with this approach. A certificate of incorporation would be required to be approved by the Secretary of State. N.Y. N-PCL ~ 403. The corpor- ation would need to obtain a franchise from the Town to operate. The corporation would also be regulated by the New York Public Service Commission, and would be required to obtain a'certificate of approval of the franchise in order to provide service, or to issue indebtedness. N.Y. Public Service Law §§ 68, 69 (McKinney 1955 and Supp. 1984-85) (hereinafter N.Y. PSL). There are three further, and more significant, disabili- ties. Although there is no clear legal precedent in this area, it seems reasonable to assume that a not-for-profit corporation would have no greater powers of eminent domain than those granted to profit-oriented utility corporations, which powers are limited to condemnation of real property and rights-of-way. See N.Y. Trans. Corp. Law ~ ll(3-a). A not-for-profit corporation could not, therefore, condemn LILCO's facilities. A not-for-profit cor- poration that was separate from the Town government and which could not be supported by the Town's credit would also not be - 12- identifiable as a "public body" within the meaning of the Niagara Redevelopment Act. Therefore, the corporation would not be eligible for an allocation of preference power. Since one of the purposes of municipalization within Southold is to obtain P~SNY power, this structure for the municipal utility would defeat a primary goal of the Town in this project. Finally, the creation of either a rural electric cooperative or a not-for-profit corporation would preclude any merger or joint operation between Southold and the Village of Greenport's system. The New York Constitution, article VIII, S 1 prohibits joint projects between municipal corporations and private corporations, such as rural electric cooperatives. 3. Public Power District or Authority. There is some limited precedent for the establishment of this kind of entity, but again there are disabilities. The primary difficulty is that such an authority may be established only pursuant to special authorizing legislation passed by the New York State Legislature. Moreover, the authority must conduct its financing activities independently of the municipal entity within whose territory it would serve. Special legislation of the kind that would be necessary was passed in 1935 to create the Albany Light, Heat and Power Authority. See N.Y. Public Authorities Law ~ 1025-1044 There is also no provision in either N.Y. Gen. Mun. Law ~ 119-o (interlocal cooperation) or 361 (service beyond territorial limits) or anywhere in the N.Y. RECL for joint action between municipals and cooperatives. - 13 - (McKinney 1982) (hereinafter N.Y. Pub. Auth. Law). The Authority, designed to exist until 1963 and to serve certain cities in the county of Albany, was permitted to extend service to other areas in the district, and was authorized to issue indebtedness and to acquire by condemnation existing plants or any other property necessary to serve electric customers within its boundaries. N.Y. Pub. Auth. Law ~ 1029. The creation of the Authority was challenged in a taxpayer suit as constituting special legislation, but was upheld by the court. Ironically, the Authority was never established, the board of directors was never appointed and the County's powers established in the statute were never exercised by the Board of Supervisors of Albany County. The court, in its review of this statute, upheld the creation of the Authority, but would not permit the County to pledge its credit for the issuance of bonds or notes. See Gaynor v. Marohn, 268 N.Y. 417, 198 N.E. 13 (1935). The court held: [T]he state may create an agency for ~h~ purpose of carrying out a state duty or function, provided of course that it does not infringe on other provisions of the constitu- tion, such as the delegation of constitu- tional authority vested in others. 198 N.E. at 16. But, the court further stated that a portion of the act, which would have permitted the County to provide funds to the Authority through the general taxing authority of the County, was unconstitutional. In a word, we may state the law to be this: The state may authorize cities, villages, or counties, as it has done by the provisions of the General Municipal Law, to establish - 14 - lighting and power plants and systems. So, too, it may create power districts for this purpose, whether they embrace a county, or a portion of a county, or many counties, but the money to be raised for this purpose, if it is to come from taxation, must be limited to a tax or assessment upon the property benefited. For instance, the county of Albany cannot be taxed for the purpose of lighting the County of Rensselaer, which goes untaxed. What shall constitute a taxing district~, and whether it be confined to, or in disregard of boundary lines of counties, townships, or lesser municipalities is a matter wholly within the discretion of the Legislature. Such a district is not inconsistent with county or town government. We think, however, that these unconstitu- tional portions of this act may be eliminated or excised without rendering the whole act unconstitutional. It is said that the board of supervisors is about to meet for the pur- pose of authorizing the issue of county bonds. This cannot be done. Whatever bonds are issued must be sold and disposed of as a charge either upon the revenues of the auth- ority or upon the property benefited by the act, that is, the area called and defined as the Albany Light, Heat, and Power District. (Citations omitted.) 198 N.E. at 18. Aside from these financing issues, there remains some uncertainty regarding whether the Authority or District would qualify as a preference entity entitled to an allocation of Niagara preference power. Furthermore, it is far from clear that the Town of Southold could obtain the passage of the required legislation, and whether it could do so within a reasonable time frame. As a purely academic matter, therefore, it may be legally and constitutionally possible to establish a Town public 15 - power system by Act of the New York State Legislature. However, in our opinion, the Town would be ill-advised to follow this course in light of the clear authority provided in Sections 360 et seq~ of the General Municipal Law. II. THE FOUR ALTERNATIVE STRUCTURES PROPOSED FOR SOUTHOLD'S MUNICIPAL POWER SYSTEM. A. Town Municipal System, Excluding the Village's Service Territory. Under this alternative, the Town of Southold would establish a municipal system under N.Y. Gen. Mun. Law ~ 360 et seq. to serve the territory within the boundaries of the Town, including Marion and Orient, and excluding the Village of Greenport and the territory served by Greenport in School District No. 10o Again, the matter of establishing a publicly- owned electric distribution system on Fishers Island is treated separately in Section III of this Report. 1. Procedure for Establishinq a Municipal System. Under Section 360(1) of the New York General Municipal Law, a municipal corporation is defined as "a county, city, town or village". Subsection (2) of that law permits a municipal corporation to "construct, lease, purchase, own, acquire, use and/or operate any public utility service within or without its territorial limits", for the purpose of furnishing to the muni- cipality or, for compensation, to its inhabitants, any service similar to that furnished by a gas or electric corporation 3_/ N.Y. Gen. Mun. Law § 360(1). - 16 - operating under the Public Service Law. "Public utility service" means the manufacture, conveying, transportation and furnishing of gas for light, heat, or power and/or the generation, furnishing, and transmission of electricity for light, heat, or power, and includes the works, structures, poles, lines, wires, conduits, mains, systems, waterpower and any and all property necessary for furnishing such service. In order to provide utility services, a municipal corporation may purchase gas or electric power and energy from the state, any state agency, other municipal corporation, or any private or public corporation. The establishment of a municipal electric system is initiated by actions of the local governing body. In the case of a project being conducted by a Town, the Town Board would adopt a resolution fixing the proposed method of constructing, leasing, purchasing or acquiring the facilities, as well as the maximum N.Y. Gen. Mun. Law ~ 360(2). The constitutionality o~ this section has been upheld. See Village of East Rochester v. Rochester Gas & Electric Corp., 262 A.D. 556, 31 N.Y.S.2d 754, 761, aff'd, 289 N.Y. 391, 46 N.E.2d 334 (1943). See also O'Flynn v. Village of East Rochester, 24 N.Y.S.2d 437, aff'd, 262 A.D. 556, 31 N.Y.S.2d 754 (1941), afl'd, 292 N.Y. 156, 54 N.E.2d 343, cert. denied sub nom. Despatch Shops, Inc. v. Village of East Rochester, 323 U.S. 713 (1944). Agreements may also be made between two or more municipal corporations, which have the authority to exercise the powers in § 360, to set up jointly a public utility service within their combined territorial limits. See N.Y. Gen. Mun. Law ~ 361(2). N.Y. Gen. Mun. Law ~ 360(1); N.Y. PSL ~ 64. N.Y. Gen. Mun. Law ~ 360(2). 17 - Upon the ordinance or local set up a municipal by the voters. and estimated cost thereof and the method by which electric ser- vice is to be furnished. See N.Y. Gen. Mun. Law ~ 360(3). Any such enactment by the Southold Town Board is sub- ject to a mandatory referendum. See N.Y. Gen. Mun. Law § 360(5). Before taking effect it must be submitted for the approval of the electors of the Town at the next general election (to ~e held not less than ninety days after adoption by the local governing body) or at a duly called special ~lection. The resolution, ordinance or local law, and notice of the referendum thereon, must be published in at least one local newspaper once a week for six weeks preceding the election. See N.Y. Gen. Mun. Law ~ 360(5). approval by the electors of the resolution, law, the local governing body is authorized to electric utility system in the manner approved 2. Acquisition of LILCO's Distribution System. In addition to merely establishing a municipal electric system, a complete municipalization project involves the acquisi- tion of the facilities and equipment necessary to operate that system. 8_/ Because LILCO currently operates an electric distri- A project cannot be defeated merely because the actual plan of operation deviates from the proposal submitted to the voters. See Town of Massena v. Niagara Mohawk Power Corp., 45 N.Y.2d 482, 410 N.Y.S.2d 276, 382 N.E.2d 1139 (1977). 8_/ Over sixty municipalities and counties in New York State have now established so-called municipal distribution auth- orities by merely establishing on paper municipal electric systems which do not own any distribution facilities or provide any utility services. PASNY has actively encouraged the formation of such "paper agencies" on the ground that they constitute public bodies entitled to receive a pref- (continued) - 18 bution system in the Town of Southold, it is assumed for purposes of this report that the municipal corporation will choose to acquire those existing facilities rather than construct duplicative facilities. If LILCO is not willing to sell its system, the Town has the authority under New York law to condemn LILCO's distribution system and to compensate it therefor. Section 360(6) of the New York General Municipal Law provides that in order to establish and operate a municipal system, a municipal corporation may acquire the public utility service of any public utility company operating pursuant to Article Four of the Public Service Law, or any other public utility service within or outside of its territorial limits. The municipal corporation may do so by purchase, or by condemnation in the manner provided by law for condemnation by a municipality erence in the allocation of hydroelectric power from the Niagara and St. Lawrence projects. As will be discussed more fully in Section IV, the law firm of Duncan, Weinberg & Miller, P.C., has consistently taken the position that such "paper agencies" are not entitled to a preference in the allocation of Niagara or St. Lawrence hydroelectric power, and that, in order to qualify as a preference customer, a municipality must not only establish a municipal utility system on paper, but must actually provide utility service by distributing electricity to ultimate consumers over facilities which it owns and operates. Because LILCO serves customers in the territory of the Town outside of the village of Greenport and Greenport's service territory in School District No. 10, pursuant to a franchise from the Town, the Town would need to terminate the franchise by revocation by its terms, or by condemnation if it is irrevocable. The current franchise, which was granted in 1971, has a term of 50 years, to 2021. It is silent as to its revocability. Only if Southold were to construct a duplicate distribution system could the franchise to LILCO remain unmodified. Under the latter circumstances, the Town would become a "dual franchise area" in which either the Town or LILCO would be authorized to provide utility services. - 19 - 10/ of private property for a public use. To fulfill its service obligations, a municipal corporation also has the power to con- struct or to acquire by purchase or condemnation any transmission lines or gas pipelines which would connect it to a source of gas or electric power or power production; the costs of such acquisi- tion may be shared'with other municipalities. 11/ Before instituting a condemnation action, the appro- priate Town officials should attempt to negotiate with LILCO the purchase of the necessary facilities. If, subsequent to good faith negotiations, such an arrangement cannot be effected, the Town must undertake the complex procedures of an eminent domain 12/ action (condemnation) as required by state law. Before the Town may institute formal eminent domain proceedings, it must hold public hearings to determine the need for the proposed project and the impact that the project would 13/ have on the environment and local residents. Notice of the hearing must be published in at least five consecutive issues of a daily newspaper published at least ten but not more than thirty days prior to the hearing. See N.Y. EDPL ~ 202. A written record of the hearing is to be kept and made available to the public. 10/ ll/ 12/ N.Y. Gen. Mun. Law ~ 360(6). N.Y. Gen. Mun. Law ~ 360(6). N.Y. Eminent Domain Procedure Law ~ 101, 104, 301 (McKinney 1979) (hereinafter N.Y. EDPL). Acquisition of property for a public use, other than real property, must also be accomplished according to these eminent domain procedures. N.Y. EDPL ~ 708. 13/ N.Y. EDPL § 201. - 20 - Within ninety days after the conclusion of the hearings, the condemnor must make and publish its determination and findings specifying the public use, benefit or purpose to be served by the project, its location, its effect, if any,~ on the environment and local residents, and any other relevant factors associated with the proposed project. The Town must also have an 15/ prepared. See N.Y. EDPL ~ 302. 14/ See N.Y. EDPL ~ 204. appraisal of the property It must then make a written offer to purchase the property for an amount which it deems to be just compensation, which shall be no less than its highest 16/ approved appraisal. See N.Y. EDPL §~ 303, 304. The offer must include an offer to pay interest on this amount from the 17/ date of acquisition to the date of the payment. LILCO may respond to the offer in one of three ways. It may accept the offer as payment in full; it may accept the offer as only an advance payment, and thus may reserve its right to claim additional compensation (which it must do within a specified time period, see N.Y. EDPL ~ 503); or it may reject the 14/ 15/ 16/ The condemnor's findings and determinations are subject to immediate judicial review. See N.Y. EDPL S 207. LILCO is required to cooperate with the Town in this regard by providing necessary information and records. The offer should be made contingent upon the Town's issuance of bonds to finance the acquisition. N.Y. EDPL ~ 303, 304(A) (1), 514. Where the condemnor fails to make an offer prior to the initiation of condemnation proceedings, the condemnee may obtain an award of its costs, after the entry of a final order and judgment by the supreme court establishing an award for the taking. Roseton Hills Sewage-Works Corp. v. Leitman, 69 A.D.2d 834, 414 N.Y.S.2d 928 (1979). - 21 - offer (failure to respond to the offer within ninety days is deemed to be a rejection). See N.Y. EDPL ~ 304(A) and <B). If the Town's offer is accepted either as payment in full or as advance payment, the Town would enter into an agree- ment or stipulation with LILCO providing for payment. See N.Y. EDPL ~ 304(A) (4). If LILCO accepts the offer only as an advance payment, it would be responsible for filing a claim for additional compensation within three years of the date of 19/ acquisition. See N.Y. EDPL ~ 304(A) (3), 503. If the offer is rejected, the Town's obligation to pay interest on the offered amount is suspended unless the offer is later accepted as full or advance payment. See N.Y. EDPL ~ 304(C). Following the offer, and LILCO's.acceptance or rejec- tion thereof, the Town may obtain a court order allowing it to acquire the property by filing a petition in the state supreme court in the judicial district in which the property is located. 20/ See N.Y. EDPL ~ 402, 501. Notice of the pendency of the condemnation proceeding must be filed in the office of the county 20/ The Town's obligation to pay interest on the payment sum from the time of acquisition to the time of full payment after a judgment by the court (see infra) terminates as to any advance payment, as of the date payment is made. N.Y. EDPL ~ 514(A). If the amount of the advance payment is later determined by the court to exceed the fair value of the property, the Town may, within thirty days of the court's decision, seek reim- bursement of the overpayment plus appropriate interest. See N.Y. EDPL § 304(H). The Town may actually commence this action as late as 3 years after the publication of the findings required by § 204 or 3 years after the conclusion of any judicial review of those findings. N.Y. EDPL ~ 401. - 22 - clerk and served upon LILCO. See N.Y. EDPL ~ 402(B). Between ten and thirty days prior to the court hearing on the petition, the Town must also advertise the condemnation by publishing a diagram of an acquisition map representing the boundaries of the property to be condemned and a notice describing the condemned property to be acquired in local newspapers for ten consecutive days. See N.Y. EDPL S 402(B) (2) (a). If the court finds that the Town has complied with the procedural prerequisites to condemnation, it will direct the immediate filing and entry of an order granting the petition. Upon the filing of that order and the acquisition map in the office of the county clerk, title to the condemned property vests 21/ in the condemnor. See N.Y. EDPL ~ 402(B) (5). Within thirty days of the'entry of the court's order granting title to the Town, the Town shall have a notice of acquisition served on LILCO. See N.Y. EDPL § 502(B). LILCO could then file its claim for damages and the court would determine the amount of compensation due. See N.Y. EDPL §~ 502, 505(C). After a final court decision on valuation, the Town must compensate LILCO for the value of the property taken to the 21/ If the court is convinced that the public interest would be prejudiced by delay, it may allow the Town to obtain tempor- ary possession of the property upon the deposit with the court of an amount to be fixed by the court. Should condem- nation be abandoned after a grant of temporary possession, however, the Town may be liable for damages. See N.Y. EDPL ~ 402(g) (6), and Section II.A.3.b, infra. Obtaining tem- porary possession may be advisable, particularly if LILCO accepts the Town's offer as partial payment and then engages in protracted litigation challenging the sufficiency of its petition. - 23 extent that amount exceeds any advance payment. The Town would also be required to pay interest on any amount due, running from the date of acquisition to the date of payment. See N.Y. EDPL §~ 304(A) (1), 514. Accord Zember v. State, 5 Misc. 2d 216, 160 N.Y.S.2d 510 (1957). In addition, the Town may be liable to LILCO for incidental expenses incurred in the transfer of the property. See N.Y. EDPL § 702(A). A final award by the court is subject to an appeal by either party. See N.Y. EDPL S 604. Below in chart form is an outline of the timing and procedures for the condemnation of a public utility by a Town under New York Law. The actions outlined here address the procedures required of a Town for the condemnation of a public utility after the authorizing ordinance, resolution, or local law has been passed by the Town Board and ratified, according to the require- ments of New York law and the charter of the Town, by the Town's electors. See N.Y. Gen. Mun. Law ~ 360(4), (5); N.Y. Town Law §§ 63, 82, 90, 91, 92, 94 (McKinney 1965). To the extent that the acquisition of the utility 22/ system might have an impact on the environment, the Town must also undertake an environmental review in accordance with N.Y. Environmental Conservation Law §§ 8-0101 et seq. (McKinney In light of the fact that the Town is acquiring an existing system, and new construction to effect the transfer will be minimal, the Town's actions will probably have little or no environmental impact. Thus, the environmental review pro- cess will impose no real impediment to the Town's acquisi- tion of LILCO's system. In the interest of completeness, however, a full description of the environmental review process is included in this Report. - 24 - 1984). The Town must begin the environmental review process early enough so that a determination regarding environmental significance is made prior to the Town Board meeting authorizing acquisition of the utility. If such determination is that an environmental impact statement is required, it should be com- pleted before the legislative body adopts any resolution, local law, or ordinance authorizing action. See Tri-County Taxpayers Ass'n v. Town Board, 55 N.Y.2d 41, 447 N.Y.S.2d 699, 432 N.E.2d 592 (1982). The environmental review process will take several weeks to complete. Procedures for Establishing a Municipally-Owned System Timing Required Action Legal Authority At least 90 days Town must adopt legis- General Municipal prior to election lation to establish Law ~ 360(4); electric utility. S 360(5) Six weeks prior to election Election Day Promptly following the election Resolution must be published in one or more newspapers published in the county once each week for six consecutive weeks prior to election. Voters approve (disapprove) resolution at general or special election. 23/ Town should attempt to purchase system. General Municipal Law ~ 360(5) General Municipal Law S 360(5) General Municipal Law ~ 360(6) 24/ 23/ 24/ Subsequent items on chart are based on the assumption of voter approval. If the attempt to purchase LILCO's distribution system is successful, the Eminent Domain Procedure Law would not apply. Subsequent steps on chart are based on the assumption that the attempt to purchase was unsuccessful. - 25 10-30 days prior to public hearing 25/ Town must publish notice of purpose, time and location of public hearing in official daily newspaper and newspaper of general circulation. Public Hearing Town must outline purpose, location of project and other pertinent information. Within 90 days after public hearing Town must make determin- ations and findings con- cerning proposed project and publish a synopsis thereof in at least two successive issues of both any official newspaper and general circulation newspaper. Within 30 days after completion of publication of findings Any person aggrieved by the determination and findings may seek judicial review thereof by an appellate division of the supreme court with jurisdiction over the property being condemned. If practicable, prior to acquisition Town must make written offer to acquire property. 90 days after offer Condemnee must accept in writing or offer is deemed rejected. Within 3 years after (1) publi- cation of determ- inations and find- ings under ~ 204; (2) date of order Town must commence acquisition proceedings. Failure to do so is consid- ered abandonment of condem- nation. or completion of pro- cedure under ~ 206 exemption from pub- lic hearings; or (3) Eminent Domain Procedure Law § 2(]2 Eminent Domain Procedure Law § 203 Eminent Domain Procedure Law S 204 Eminent Domain Procedure Law § 207 Eminent Domain Procedure Law § 303 Eminent Domain Procedure Law § 304 (B) Eminent Domain Procedure Law S 401(A), ~ 401(B) A public hearing is required prior to acquisition unless such acquisition falls within specified exceptions to the public hearing requirement. Subsequent steps on chart presume public hearing. - 26 entry of final order of judicial review of findings and de.- terminations Prior to filing acquisition map and within 3-year period detailed above Town must obtain order from supreme court for permission to acquire prop- erty and to file map by present verified petition to supreme court in the judicial district where property is located. At time of filing petition Town must file in the office of the clerk of the county where the property is located a notice of the pendency of the proceeding, including a general descrip- tion of the property. At least 20 days prior to return date on petition Town must serve notice of the proceeding on the condemnee 10-30 days before return date of application Town must publish diagram or representation of property to be acquired in ten successive issues of any official and general circula- tion newspapers. 26/ Upon presentation of verified peti- tion to court The condemnee may interpose a verified answer, possibly resulting in a trial on the merits. Time of proceed- ing Court shall direct filing of order granting petition. The Town shall file and enter order and acquisi- tion map in the office of the county clerk. Title then vests in the Town. Eminent Domain Procedure Law § 402 (B) Eminent Domain Procedure Law ~ 402(B) (1) Eminent Domain Procedure Law ~ 402(B) (2) Eminent Domain Procedure Law S 402(B) (2) Eminent Domain Procedure Law S 402(B) (4) Eminent Domain Procedure Law ~ 402(B) (5) 26/ If the Town conducted a public hearing under Article 2 of the Eminent Domain Procedure Law, it may dispense with the requirement of publication in ten consecutive issues of newspaper of general circulation. - 27 At any time dur- ing acquisition proceeding Court may order possession. temporary Eminent Domain Procedure Law ~ 402(B) (6) After proceeding The Town must give its legal advisor a copy of the acquisition map, and the legal advisor must certify the names of the condemnees. Eminent Domain Procedure Law ~ 403 Within 30 days after entry of the order grant- ing the petition The Town must cause a notice of acquisition to be published in at least ten successive issues of official newspaper or newspaper of general circulation in the Town and mail such notice to each condemnee of record. Eminent Domain Procedure Law ~ 502 (B) Within the time specified by the court Condemnee shall file written claim of damages with clerk of court with jurisdiction. Eminent Domain Procedure Law ~ 503 After 30 days of entry of order granting the petition Town must serve and file a note of issue pur- suant to Civil Practice Law and Rules. Eminent Domain Procedure Law § 506 Within 60 days after claims issues finally submitted to court Judge must decide award. Eminent Domain Procedure Act § 512; Civil Practice Law and Rules § 4213 One final point should be made as to the timing of these procedures. Even before the municipality files a petition in condemnation with the County Court and thereby institutes formal litigation, there are numerous points in the process of acquiring the utility at which litigation could occur. For instance, in the efforts of both the Town of Massena, New York, and the Town of Springfield, Vermont, to become municipal elec- tric utilities, the affected investor-owned utilities challenged in court the sufficiency of the referenda held by the Towns. In fact, any formal action taken by the Town in this case, no matter - 28 - how carefully planned, could lead to court action if the con- demnee utility is determined to resist acquisition at all costs. Any such court actions could lead to delays in the acquisition of the project, as well as increased expense. 3. Other Acquisition Issues. a. Consequential or Severance Damages. Other elements of the cost of acquisition in eminent domain proceedings include consequential damages and severance damages. Consequential damages refer to any injury to the con- demnee resulting from a taking of part of its property. See 4A Nichols on Eminent Domain, § 14.01 3d ed. 1985). Such damages may or may not be compensable. Id. Severance damages refer to the diminution in value of the acquired property which may result from a partial taking. See id. S 14.0113]. To the extent that LILCO owns transmission facilities, substations, and generating plants which might be rendered fully or partially idle .as a result of the municipalization project, LILCO may claim the value of the idled facilities as severance damages if they are not taken as part of the acquisition. Because the bulk power will presumably be delivered to the new municipal system over the same transmission facilities which currently deliver that power, the risk of incurring substantial severance damages should be minimal. Because LILCO has been, and will be in the future, at some financial risk because of the construction delays and cost overruns associated with its Shoreham plant, among othe~ reasons, there is some concern that LILCO may attempt to obtain from the - 29 - Town some form of severance or consequential damages from lost sales or useless Shoreham capacity suffered due to the Town's condemnation of part of LILCO's system and takeover of a portion of LILCO's load. For the reasons below, we do not consider the Town to be subject to any great risk of a large severance or consequential damage award to LILCO for these facilities. At this point in time, the Shoreham plant has not been certified as commercially operable and only a portion of the funds expended in construction work in progress (CWIP) ]nave been allowed in LILCO's rate base. There is a serious question as to whether, from a safety, economic or political standpoint, LILCO will ever be permitted to operate the Shoreham plant on a com- mercial basis. If the plant does not become commercially oper- able, it fails to qualify as a utility facility which is "used and useful" and LILCO would never be permitted to place the full imbedded costs of the plant into the Company's utility rate base. If the plant is not permitted to become "used and useful" through commercial operation, we are of the opinion that LILCO would have absolutely no viable claim for severance or conse- quential damages related to Shoreham as a result of the muni- cipalization of the distribution system by the Town of Southold. The general rule in New York is that a municipality cannot appropriate part of the property of a public utility for its own use without compensating the utility for severance or consequential damages to the remainder of its property. See 19 N.Y. Jur., Eminent Domain, ~ 240; see also 20rgel on Valuation, - 30 - Eminent Domain, § 223 (1953). One major treatise on eminent domain has set forth the rule as follows: When only part of a parcel is taken, the condemnee is entitled to compensation not only for the portion which is taken but also for any damage caused to the remainder of the tract. Thus, "severance damages" arise if the value of the remaining property declines and this reduction in value is a direct result of the taking. 7A Nichols on Eminent Domain, ~ 12.0211] (3d ed. 19S4) (emphasis added). It is up to the utility to make a convincing showing to the court that the value of the remaining property has declined as a direct result of the taking, which would be an extremely difficult task for LILCO in the situation at hand. New York courts sometimes differentiate between "severance" and "consequential" damages. In one early case (not decided under the current EDPL), the court ruled that a condemnee may recover severance damages where "only a portion of the property is taken and compensation must be paid for the resultant damage to the portion not taken"; a condemnee may not ordinarily recover consequential damages, though, where all is taken and a claim is made "for compensation for subsisting contractual liabilities of the condemnee." In re Fifth Avenue Coach Lines~ Inc., 259 N.Y.S.2d 313, 339 (Sup. Ct. 1964), afl'd, 261 N.Y.S.2d 784 (A.D. 1965), mod. on other grounds, 273 N.Y.S.2d 52, 219 N.E.2d 410 (N.Y. 1966). And one New York court stated the amount of severance compensation to be paid as follows: If a portion only is taken, the owner is entitled to be compensated for the difference between the fair market value of the entire property and that of the remainder, after the needed portion has been pre-empted. In re Smith St. Bridge Co., 255 N.Y.S. 801 (A.D. 1932). See also 4A Nichols, ~ 14.02 n.16. Puqet Sound Power & Liqht Co. v. City of Puyallup, 51 F.2d 688 (9th Cir. 1931), while not decided under New York law, is also instructive. It is a seminal decision on severance damages for partial takings of utilities. See also Annot., 68 A.L.R.2d 392, 408 (1959). In Puyallup, a city condemned the distribution system of a private utility. The utility claimed severance damages. The parties conceded that the utility was entitled to compensation for damage to its remaining property, due to the severance of the property taken. No award was made by the court, however, because of persuasive testimony on the part of the city that severance damages due to the idle plant would be de minimus because of anticipated city's new system would bear such utility's overall load. load growth and because the a small portion of the Even if there is no question that the general rule under New York law allows severance or consequential damages, there is no certainty whether or when LILCO could convince a court that it suffered damages due directly to the creation of a Town municipal system by Southold and the resulting taking of LILCO's distribution system. While the Town should be aware that such a claim may be made by LILCO, there is no certainty that LILCO could prevail on its claim. 32 - b. Ownership and Liability Upon Abandonment of the Project. Because the final determination of a compensation award is made by the court after title to the condemned property has passed to the municipality, it is never certain until late in the eminent domain proceedings whether the final award will in fact fall within the amount authorized for the taking by the Town's Board and electors. If the amount awarded is greater than that authorized, the question becomes one of whether the Town may abandon the condemnation, and at what cost, and where the ownership of the condemned system lies. The Town may abandon the condemnation if the compensa- tion award is greater than the amount the municipality is auth- orized to pay. See In re City of Rochester, 92 N.Y.S. 405, 409 (1905). The Town may, however, in the Court's discretion, be required to pay damages to LILCO for the expenses it incurred during the condemnation proceedings. See N.Y. EDPL ~ 702(B). See also City School District of the City of Kingston v. Vasilevich, 402 N.Y.S.2d 865 (1978); Terrace Hotel Co. v. State, 281 N.Y.S.2d 34, 227 N.E.2d 846 (1967). The damages may include attorneys' and experts' fees. See Terrace Hotel, supra; In re Jay Street~ Borough of Brooklyn~ City of New York, 5 N.Y.S.2d 262 (1938); In re Bastian, 281 N.Y.S. 256 (1935). They may also include loss of rents, see In re Bastian, supra, or, in the case of LILCO, possibly the loss of revenue from the Town for the period of the actual taking. A further question arises, however, because of the provision in the EDPL (enacted in 1977) that causes title to pass - 33 - to the condemnor, not upon final payment of the condemnee's claim, but upon the filing, in the Office of the County Clerk, of acquisition maps and an order of the supreme court permitting the 27/ condemnation. See N.Y. EDPL § 402(B) (5). Because of this provision, the Town may move to condemn the utility, obtain title according to the statutory condemnation procedure, and then find that an award to LILCO by the jurisdictional court (after a hearing on a dispute by LILCO as to the full value of the con- demned property) would exceed the estimated and maximum costs of the condemnation to the Town, as those costs were authorized by vote of the Board and subsequent referendum of the electors (see N.Y. Gen. Mun. Law ~ 360(3)-(5)). Under these circumstances, the Town would be required to obtain further authorization for 27/ Section 402(B) (5) provides: At the time and place mentioned in such notice, unless the court shall adjourn the application to a subsequent date, and in that event at the time and place to which the same may be adjourned, upon due proof of service of notice and upon filihg of such petition and proof to its satisfaction that the procedural requirements of this law have been met, the court shall direct the immediate filing and entry of the order granting the petition, which order the condemnor shall file and enter together with the acquisition map and the bond or under- taking if required, in the office of the county clerk or register in each county in which the real property or any part thereof is situated. Upon the filing of the order and the acquisition map, the acquisition of the property in such map shall be complete and title to such property shall then be vested in the condemnor. - 34 - expenditure of funds from the Town electors to proceed with the acquisition and meet the award amount, if the added expenditure would not cause the Town to exceed its constitutional debt limi- tation. See N.Y. Const. art. VIII, ~ 4(b). Failing such author- ization, however, or if the constitutional debt limitation would be violated and nc, exemption could be obtained under ~ 123.00 of the Local Finance Law, see infra, a worst-case scenario would be that the Town owned title to the property, but could not meet the compensation award, and LILCO refused to accept title back. The question then would be whether title would revert to LILCO, or whether the Town would retain title, by operation of law, and would therefore have to pay LILCO the full award amount, or whether the Town could dispose of the property to a third party. Section 406 of the EDPL provides for the abandonment of condemned property. It states that if the condemnor abandons the project for which the property was acquired and the property has not been materially improved, the condemnor must give first right of refusal for the property to the former owner, if the abandon- ment is~within 10 years of the acquisition of the property, at the fair market value of the property at the time of such offer. See N.Y. EDPL ~ 406(A). The language of this section (which in its totality does not specifically provide for this hypothetical situation) clearly suggests that once title is vested in the condemnor, it does not automatically revert to the former owner upon abandonment, but remains in the condemnor. Although the result in the case at hand is far from clear because there evidently has arisen no situation like it to - 35 - date, other cases do shed light on the liability of the condemnor for compensation to the condemnee in the event of an abandonment. Only one of these cases was decided under the EDPL. In Kahlen v. State, 223 N.Y. 383, 119 N.E. 883 (1918), the State of New York had appropriated land for a port of call on the Hudson River, and, before payment of the condemnee's claim, had rescinded and cancelled the appropriation. The question, the court stated, was "whether the actual appropriation of the claimants' land fixed the obligation of the state to make compensation therefor". 119 N.E. 883, 884. Under the condemnation law in effect at the time, how- ever, there was no specific provision for abandonment. The specific provision determining when title vested in the condemnor stated that title vested only upon payment of compensation. Id. at 885. The state argued that it neither had title, nor owed compensation to the former owner, but was liable for damages for detention only. I~d. The court disagreed. While noting that it is in the power of the Legislature to determine when a taking is complete, it held that even that body cannot say that after a taking is complete there can be no recovery. Id. Compensation was not a condition precedent to a valid appropriation; the taking was not temporary or tentative, it was "complete". Id. Once completed, the state was compelled to pay the condemnee. One important distinction to be made concerning this case is that, at the time it was decided, there was no statutory provision for abandonment. Id. at 886. However, the abandonment section in the EDPL does not seem to cure the primary difficulty - 36 - of the Town's hypothetical situation, and of Kahlen v. State: that title vests at an early stage, and once it does, compensa- tion is due and payable. The current abandonment provision seems to be designed more for the protection of the former owner against possible third party purchasers, rather than in any way for the protection of the condemnor. 28/ In Zember v. State, 160 N.Y.S.2d 510 (Ct.C1. 1957), the condemnee sued to recover interest for the period of time between the entering and possession of her property, and the time title vested upon filing of maps with the Clerk of the County. The Court discussed at length the State's liability to pay, noting that if the State had possessed but abandoned the property prior to vesting, the property would return to the original owner, with compensation due for the occupancy. Id. at 515. When title vests, however, the appropriation is deemed complete, and any expectation for reversion is evidently extinguished. Id. A later case also provides no indication that the former owners must accept title to property that has been condemned and then abandoned. In Fur-Lex Realty~ Inc. v. Lindsay, 367 N.Y.S.2d 388 (N.Y.Sup. Ct. 1975), the court held that the rule is well-settled that where the fee to property is, in good faith, appropriated for a particular public purpose, the An earlier case, In Re Waterfront in City of New York, 190 N.Y. 350, 83 N.E. 299 (1907), demonstrates that the normal situation is that the former landowner wishes to regain title. That case holds inter alia that upon abandonment, the former owner has no right to regain title to the land. See 83 N.E. 299 at 302, and cases cited therein. 37 - municipality may subsequently convert it to other uses or abandon it without reversion to the former owners. Id. at 390. 29/ There does not appear to be any reported case in which the condemnor wishes to abandon the property in the face of the condemnee's desire for compensation rather than a return of title. There also does not seem to be any reported case in which the condemnor, wielding sovereign authority, is unable to pay. Although this certainly does not mean that counsel for LILCO is correct in arguing that a condemnation of the utility would amount to handing LILCO a blank check signed by the Town, it does mean that the Town should proceed with extreme caution in any condemnation action, with an awareness that extricating itself from such a decision may not be particularly simple. It appears, however, that the Town could not be forced to expend more funds than had been originally authorized by the Town electors. If the court's award in condemnation exceeds the amount approved in the referendum by the voters in the Town, and the voters refuse to authorize the additional funds necessary to complete the condemnation, the Town Board would lack the auth- ority to go forward with the condemnation portion of the munici- palization project. The approval of the Town electors of the maximum cost of the project is required by ~ 360(3) of the N.Y. Gen. Mun. Law for the project to go forward initially. 29/ In the sole case in this area decided after the EDPL was passed, 124 Ferry St. Realty Corp. v. Hennessy, 440 N.Y.S.2d 419 (1981), there was no issue about the former owner's desire, or lack of it, to repurchase the abandoned property. - 38 - It is black letter law that "municipal corporations are held to a very strict compliance when they act under legislative authority, that is, in derogation of the common law." 39 N.Y. Jur., Municipal Corporations ~ 173 (1965); Marine Midland Trust Co. v. villaqe of Waverly, 42 Misc. 2d 704, 248 N.Y.S.2d 729 (1963), afl'd, 21 A.D.2d 753, 251 N.Y.S.2d 937 (1964); Civil Service Forum v. N.Y.C. Transit Authority, 4 A.D.2d 117, 163 N.Y.S.2d 476 (1957), aff'd, 4 N.Y.2d 866, 174 N.Y.S.2d 234 (1958); Gordon v. McGovern, 284 A.D.25, 130 N.Y.S.2d 168 (1954), aff'd, 308 N.Y. 989, 127 N.E.2d 844 (1955); Pressel v. Ferris, 148 Misc.910, 266 N.Y.S. 517, 518 (1933); City of Syracuse v. Snow, 123 Misc. 568, 205 N.Y.S. 785 (1924); City of Yonkers v. Yonkers R. Co., 51. A.D. 271, 64 N.Y.S. 955 (1900). In authorizing municipalities to act as business entities in the field of public utility services, the authors of section 360 provided that there be a statutory mechanism to safeguard the taxpayers from any decisions by elected officials to incur debts too large for the municipalities to support or afford. Thus, the requirements expressed in subdivision 3 of section 360 represent a carefully drafted compromise between allowing a municipality to conduct a profit-making business, and placing debt limitations on such activity. Attempts to evade debt-limitation provisions by subterfuge are universally frowned upon, and it has been said that arguments of convenience, of policy, or of present necessity should not be allowed, by loose construction, to weaken the force or limit the extent of such provisions. - 39 - Marine Midland Trust Co. v. Villaqe of Waverly, 42 Misc.2d 704, 248 N.Y.S.2d 729, afl'd, 251 N.Y.S.2d 937 (1963) (citations omitted); see also Gardner v. Town of Cameron, 155 A.D. 750, 140 N.Y.S. 634 (1913),~ aff'd, 215 N.Y. 682 (1915). If the Town Board were to attempt to raise the necessary additional funds by another method than the original approved bond issuance, and go forward with the condemnation, such action would be ultra vires the Board's authority, and null and void as a matter of law. See Granada Buildings, Inc. v. City of Kingston, 58 N.Y.2d 705, 458 N.Y.S.2d 906 (Ct. App. 1982); Village of Canastota v. Queensboro Farm Products, Inc., 44 A.D.2d 276, 354 N.Y.S.2d 451 (3d Dept. 1974), afl'd, 36 N.Y.2d 793, 369 N.Y.S.2d 700 (1975). Any further action by the Town to acquire LILCO's system for an amount greater than the maximum approved by the Town electors would fail. An order by the court setting forth a condemnation award that is higher than the approved amount could not, of course, change these circumstances. It is well-established that a court cannot require illegal action to fulfill statutory requirements, and thus cannot order a muni- cipality to act ultra vires. Where statutory provisions are in conflict, they must be read in harmony and each made effective wherever possible. See Administrator~ FAA v. Robertson, 422 U.S. 255 (1975); Morton v. Mancari, 417 U.S. 535 (1974). Closely related statutes are to be construed together if possible, so as to effectuate the legislative policies of both. Thielebeule v. M/S Nordsee Pilot,. 452 F.2d 1230 (2d Cir. 1971). - 40 - Moreover, although the New York Eminent Domain Procedure Law was enacted well after ~ 360 of the General Municipal Law, the EDPL did not repeal or modify the provision in ~ 360 of the General Municipal Law requiring the approval of the municipal electors before the maximum amount of municipal funds could be spent for the municipal utility project. It is an established principle of statutory construction that repeals of statutes by implication are disfavored. See Administrator, FAA v. Robertson, supra. Finally, if the court's award in condemnation were a great deal higher than that approved by the Town electors, it could exceed the amount permitted under the debt limitation for the Town as prescribed in the New York Constitution. See N.Y. Const. art. VIII, ~ 4(f). Should that be the case, no order of the court could be effective to require the Town to violate the Constitution. It has long since been held that: A written constitution must be interpreted as the paramount law of the land according to its spirit and the intent of its framers, as indicated by its terms. In this sense it is just as obligatory upon the legislature as upon other departments of the government or upon individual citizens. Rathbone v. Wirth, 150 N.Y. 459, 45 N.E. 15, 23 (1896). Thus, a court cannot, pursuant to one statute (the Eminent Domain Procedure Law), order the Town to violate another (~ 360 of the General Municipal Law), or to violate the Constitution. Despite these apparent legal protections for the Town, there is no statutory interpretation which clarifies which party holds title when abandonment occurs. If the Town were saddled 41 - with the utility's property, the hopes of finding another buyer would be virtually nil, with the exception perhaps of the State itself, or the New York Power Authority as agent for the State. The Town should also be aware of its liability upon abandonment for incidental expenses, including attorneys' fees, incurred by the utility during the abandonment proceedings. See N.Y. EDPL ~ 702(B). 4. New York lic use without just compensation. See also U.S. Const., amends. V, XIV. Arriving at the lodestar of just compensation, however, is often problematic, particularly when the power of eminent domain is exercised with respect to public utility property. In New York State, courts have recognized at least four distinct theories to assess the value of utility property: Original Cost Less Deprecation (ocLD); Reproduction Cost New Less Depreciation (RCNLD); Capitalization of Earnings; and Fair Market Value. Since utilities in New York State are regulated on the basis of an original cost rate base, 30/ it can be logically and persuasively argued that the most appropriate method of deter- mining just compensation for facilities acquired by eminent domain is original cost less actual depreciation (OCLD). This Principles of Valuation. Article I, section 7 of the Constitution of the State of states that private property shall not be taken for pub- 30/ In this regard, regulated utilities in New York State are permitted to earn an approved rate-of-return on the net book value (depreciated original cost) of the utility facilities which are used and useful in providing electric service to the utility's ratepayers. - 42 - method of valuation recognizes that the utility's stockholders have already earned an authorized rate-of-return on the depre- ciated portion of the condemned assets and, under these circum- stances, an award in excess of the remaining net book value of the condemned facilities would result in a windfall to the 31/ utility's stockholders. As discussed more fully below, the Town of Massena, New York, urged the Commissioners of Appraisal to adopt OCLD as the basis for the valuation of Niagara Mohawk Power Corporation's distribution system which was condemned by the Town. The award in the Massena condemnation case was approximately two and one-half times the net book value of the assets condemned, but still substantially less than the award sought by Niagara Mohawk based upon a reproduction cost less depreciation methodology. Since the Town of Massena and Niagara Mohawk reached a settlement before an appeal was perfected by either party, the appraisal report was not reviewed by the Appellate Division or the Court of Appeals and probably should not be regarded as a definitive precedent on the question of proper utility valuation methodology. As demonstrated in the Massena condemnation case, no single valuation theory has been embraced by New York courts in eminent domain proceedings, nor is any single theory discussed below likely to be relied on exclusively by the court. There is 31/ Essentially the same results will be achieved by basing the award on capitalization of earnings. See discussion infra. - 43 simply no hard and fast rule to determine just compensation in all cases. See United States v. Commodities Trading Corp., 339 U.S. 121, 123 (1950). It may reasonably be presumed, however, that if resort to an eminent domain proceeding is necessary, LILCO will assert that RCNLD is the appropriate theory by which 32/ its property should be valued. That position is based in large part on the case of City of New York v. Fifth Avenue Coach Lines~ Inc., 22 N.Y.2d 613, 294 N.Y.S.2d 502, 241 N.Eo2d 717 (1968). The Fifth Avenue case notwithstanding, there is substantial support for the use of OCLD or capitalization of earnings as the appropriate theories of valuation. RCNLD was historically accepted as the appropriate valuation methodology in cases decided before World War I, when prices and costs of construction were rapidly increasing, and the concept of rate of return on investments in utility property was considerably different from what it is today. These differences 33/ were noted in the Regional Rail case, in which Judge Friendly rejected a line of cases supporting RCNLD, stating: [M]any of these cases stem from the heyday of Smyth v. Ames and even more extreme Supreme Court decisions extolling the role of repro- duction cost in public utility valuation for rate-making purposes, e.g., McCardle v. Indianapolis Water Co., 272 U.S. 400, 47 32/ 33/ The RCNLD theory bases the value of the property on the current cost of duplicating the facilities, less deprecia- tion to reflect the current condition of the facilities. Orgel, Valuation Under Eminent Domain ~ 210 (1953). In re Valuation Proceedings Under Section 303(c) and 306 of the Regional Rail Reorganization Act of 1973, 445 F. Supp. 994 (Special Court 1977). -44 - S.Ct. 144, 71 L.Ed 316 (1926). It is natural that this should have had a spillover into public utility condemnation and when the utility was a profitable one, earninq a return on a RCNLD rate baser reference to RCNLD as a factor would have been not only natural but perhaps defensible. 445 F. Supp. at 1036 (emphasis added). The Supreme Court later repudiated Smyth v. Ames, 169 U.S. 466 (1898), and replaced the RCNLD theory with the "end result" theory. See Federal Power Commission v. Hope Natural Gas, 320 U.S. 591 (1944). In the Hope Natural Gas case, it was decided that a utility was entitled to a fair return on its investment dedicated to public service (or OCLD), and that the public has a right to demand that no more be extracted from it than the services rendered are reasonably worth. Rates were to be determined on a rate base developed using the utility's actual investment. As noted above, the New York State Public Service Commission has adopted the Hope Natural Gas rationale and now regulates electric utility rates on the basis of OCLD. The Fifth Avenue case is unique, and therefore distinguishable from the circumstances involved in the contemplated municipal acquisition project, insofar as it involved the condemnation of a bus line which was inherently incapable of profitable operation because of the city's (i.e., the condemnor's) suppression of its earning power through rate regulation. This distinction was noted by the New York Court of Appeals in a subsequent case in which the court approved an award based on OCLD. See Matter of the Port Authority Trans-Hudson Corp. v. Hudson Rapid Trans. Corp., 20 N.Y.2d 457, 285 N.Y.S.2d - 45 - 24, 231 N.E.2d 734 (1967), cert. denied, 390 U.S. 1002 (1968) (hereinafter "PATH"). In that case, the court stated: Most recently [in Fifth Avenue Coach I] we likewise departed from the general rule where to do otherwise would have, in the words of the Supreme Court, resulted in "manifest injustice to the owner" of the property. In that case both lower courts and this court awarded amounts far in excess of what could have been realized on the open market because of the financial condition of the condemnee. We felt it would not conform to traditional standards of equity and justice to permit the city to break the company financially and then pick up the pieces at a highly depreciated rate. We are well aware of the distinction between this case and cases we have just cited and discussed. Nevertheless, the common thread which runs through all of them is that just compensation requires a result which is "'just' both to an owner whose property is taken and to the public that must pay the bill." PATH, 20 N.Y.2d at 469-70, 285 N.Y.S.2d at 31-32, 231 N.E.2d at 739. New York courts have thus indicated in Fifth Avenue and PATH that RCNLD is not a constitutionally mandated standard of valuation in a utility condemnation. Moreover, in the Regional Rail case, Judge Friendly noted that "whatever authority [Fifth Avenue Coach3 might have lent to the use of reproduction cost in valuing an unprofitable utility is undermined by the subsequent decision of the same court in PATH." 445 F. Supp. at 1036. The third theory of valuation, capitalization of earnings, has been defined as the sum of money whose annual return, at the highest rate which it can certainly earn, equals the value of a perpetual flow of earnings from the property. See - 46 - Marston, Winfrey & Hempstead, En~ineerin~ Valuation and Depreciation 8 (1953). With respect to utility property, the earnings of which are regulated by government agencies, this theory of valuation is based on ratemaking methodology. New York, being an original cost ratemaking jurisdiction, bases rates, and concomitantly, earnings, on a percentage of the rate base value of property -- i.e., OCLD. Because the rate of return allowed on utility property is a function of the cost of capital, the value of the property to its present owner (which is the future stream of earnings discounted to today's dollars) is equivalent to rate base. OCLD and rate base are, therefore, equal. The final theory of valuation is fair market value. Evidence of comparable sales, to the extent they exist, will be 34/ considered in determining the value of the condemned property. In addition to valuing the physical property acquired, condemnation of public utility property often involves compensa- tion for the "going concern" value of the property, i.e., the additional value that property used in an ongoing business has compared to property which does not. Although legal counsel is of the opinion that an award for going concern value is 34/ In the Massena condemnation case, numerous sales and ex- changes of utility property and facilities were examined. None of these transactions were found to be "comparable" by the Commissioners of Appraisal and, based upon the discus- sion of "comparable sales" and fair market value method- ology, it would appear that the Commissioners of Appraisal gave very little weight to this method of valuation. We would anticipate the same result if Southold were to condemn LILCO's distribution system. - 47 - duplicative where the value of the property taken is established by means of its earning power, a recovery for going concern value may be allowed in utility condemnations, depending upon which valuation theories are ultimately relied on. In the Massena condemnation case, the Commissioners of Appraisal recognized OCLD, RCNLD and capitalization of earnings as indicia of value, but found no theory alone to be d~spositive on the question of just compensation. The Commission rejected the utility company's claims for consequential and severance damages and concluded that the company's claimed damage to going concern value was "excessive." See Town of Massena v. Niagara Mohawk Power Corp., No. 59244 (Comm'rs Report, Aug. 16, 35/ 1980). Of course, that decision applies only to the facts of that case and provides no answer as to how a court would necessarily view the facts of this case. For the reasons explained above, the Massena condemna- tion case, while instructive, does not provide a definitive prece- dent to be relied on in future utility condemnations. There, the facilities condemned had a net book value of $1.8 million. The Town of Massena initially offered $2.8 million before filing the condemnation suit. Niagara Mohawk rejected the offer, claiming that the condemned facilities had a reproduction cost new of 35/ This report is not part of any reported decision, and can only be obtained by writing to the Clerk of the County Court. In light of this difficulty, we have appended hereto a copy of this Report, for the Town of Southold's convenience. - 48 - $7,566,150. Niagara Mohawk also claimed severance, consequential, going concern and other damages amounting to $6,198,602 for a total claim for compensation in the amount of $13,764,752. After protracted proceedings before the condemnation court and the Commissioners of Appraisal, and several ancillary suits initiated by Niagara Mohawk, the Commissioners of Appraisal finally awarded Niagara Mohawk a total of $4.751 million, which consisted of $4,214,000 for physical facilities, $410,000 for "going concern" assets, $105,000 for the value of easements taken, and $22,000 in consequential damages. As noted above, the award approximates two and one-half times the net book value of the facilities condemned. The Town of Massena, as a result of a settlement agreement reached with Niagara Mohawk, subsequently acquired the two substations and the distribution systems located in three neighboring communities as well as the facilities origin- ally condemned. Massena's total investment in the system acquired from Niagara Mohawk, including legal, engineering and financing costs, was approximately $10 million, which the Town will have 36/ fully recovered in this, the fifth full year of operations. 5. Methods of Financing. a. Procedures for Issuance of Bonds. Section 362 of the New York General Municipal Law allows municipal corporations to finance the acquisition of utility facilities through the use of tax revenues or the 36/ The original referendum was held by the Town of Massena on May 30, 1974. The Massena municipal electric system began operations on May 8, 1981. - 49 issuance of bonds.. It is assumed here that the Town will wish to finance the project through the issuance of bonds. The procedures by which a municipal corporation issues bonds are set forth in the Local Finance Law. They are outlined here briefly to help facilitate planning. The financing required to conduct a municipalization project such as that contemplated 37/ herein must be developed in consultation with bond counsel. In order to issue bonds, a municipal corporation must adopt a bond resolution that sets forth the purpose for which the bonds will be used, the estimated maximum cost of the project to be financed, the overall plan of financing the project, the amount of bonds to be issued, the period of probable usefulness 38/ of the project to be financed, a statement of whether the maturity of the bonds will be more than five years, and a statement of whether the municipal corporation will appropriate current funds for the project prior to issuance of the bonds. See N.Y. Local Finance Law ~ 31.00, 32.00 (McKinney 1968 and Supp. 1984-85). Such resolution must first be enacted by a Duncan, Weinberg & Miller, P.C., does not provide the service of bond counsel. The Town should retain and rely upon the advice of bond counsel for final analysis of the procedures that must be followed to issue bonds. In addi- tion, the Town is strongly urged to seek advice and infor- mation on the tax reform legislation under consideration by Congress, to become fully aware of the potential impacts such legislation may have on municipal funding in the short and long-term future. Municipalities. may incur indebtedness for the period of "probable usefulness" or life of the project which they finance. For public utility facilities, that period is thirty years. See N.Y. Local Finance Law ~ 11.00. - 50 - three-fifths vote of the Town Board and then be submitted to a referendum. See N.Y. Local Finance Law ~ 33.00; N.Y. Gen. Mun. Law ~ 360(5). See also Niagara Mohawk Power Corp. v. Town of Massena, 92 Misc. 2d 587, 400 N.Y.S.2d 430 (1977). There are no other procedures imposed by state law for adoption of a bond resolution. The Town must comply, however, with any procedures established in its own resolutions and by-laws for adoption of resolutions. The timing of the bond resolution is within the dis- cretion of the Town, and such resolution need not be adopted (or bonds issued) at the time the ordinance or local law authorizing acquisition of the system is adopted or the referendum thereon is held. See Town of Massena v. Niagara Mohawk Power Corp., 60 A.D.2d. 139, 400 N.Y.S.2d 862, 865-866 (1977), aff'd, 45 N.Y.2d 482, 410 N.Y.S.2d 276, 382 N.E.2d 1137 (1978). As a practical matter, however, the Town may wish to adopt the bond resolution at a fairly early stage, in order that the referendum thereon may be held simultaneously with the election to establish the system. b. Types of Financin~ Available. Most states allow municipalities to issue revenue bonds to finance capital projects. Revenue bonds are secured exclu- sively by the facilities purchased and the revenues derived therefrom. Bondholders purchasing revenue bonds must therefore look to the utility system for security and cannot rely upon the municipality's taxing authority. Where this method of financing is permitted, the municipality need not pledge its faith and credit as it must in issuing general obligation bonds. - 51- The Constitution and Local Finance Law of the State of New York, however., make no provision for the issuance of revenue bonds for any purpose. The Constitution provides that: No indebtedness shall be contracted by any county, city, town, village, or school district unless such county, city, town, village or school district shall have pledged its faith and credit for the payment of the principal thereof and the interest thereon. N.Y. Const. art. VIII, ~ 2. The New York Court of Appeals has effectively ruled that a municipality cannot avoid a statutory restriction like that in the Constitution by establishing a separate authority to issue bonds. See Tierney v. Cohen, 268 N.Y. 464, 198 NoE. 225, aff'd sub nom. N.Y. Edison Co. v. New York, 268 N.Y. 669, 198 .N.E. 550 (1935). In that case, the Board of Electors in New York City planned to place on the ballot a measure to establish an "authority" which would finance a power plant on its own credit, without pledging the credit of the city. Relying on the General City Law, which prohibited indebtedness without the contracting by the City of its own faith and credit, and the General Municipal Law, the court found the city's attempt to issue obligations without pledging its faith and credit void ab initio. While the General City Law has since been amended, the limitation in the General Municipal Law, which controls the establishing and financing of municipal electric systems in New York State, remains the same as it was in Tierney. See also New York State Electric and Gas Corp. v. City of Plattsburgh, 281 - 52 - N.Y. 450, 24 N.E.2d 122 (1939); New York Edison Co.~ Inc. v. City of New York, 268 N.Y. 669, 198 N.E. 550 (1935). It would therefore appear that if the Town wishes to issue ~bonds to finance the municipalization project, it must issue either general obligation bonds or so-called "double- barrel" bonds. "Double-barrel" bonds are essentially general obligation bonds which contain a provision that bondholders must look first to the facilities financed thereby, and the revenues therefrom, as security for the bonds. If the project proves not to be "self-liquidating" and fails financially, the issuer of the bonds, through its taxing authority, must bear the final finan- cial responsibility. Purchasers of double-barrel bonds therefore have full security on their investment. At the same time, the taxpayers of the Town issuing double-barrel bonds have the assur- ance that the facilities financed and the income therefrom will be liquidated and used to serve bonded indebtedness before the bondholders have recourse to the general taxing authority of the municipality. If the Town wishes to finance the up-front costs of acquiring choices. the project by First, section allows municipalities to issuing notes, it has at least two 23.00 of the N.Y. Local Finance Law issue "bond anticipation notes." These notes may be issued only when bonds have been actually auth- orized, and the revenue derived therefrom may be expended only for the same purpose or class of purposes as will the revenue from the bonds. - 53 - Second, New York municipalities are authorized to issue "revenue anticipation notes." See N.Y. Local Finance Law ~ 25.00. The use of such notes is severely restricted as to amount and duration and may not be issued to finance a specific object or purpose. See 4 Op. State Compt. 257 (1948). Bond counsel may be aware of other methods to finance up-front and the underlying acquisition costs. c. Constitutional Debt Limitation. All towns, as well as other municipal corporations, are subject to a debt limitation under article VIII, section 4 of the New York State Constitution. The limitation is applicable to the issuance of general obligation bonds for the purpose of financing the acquisition of an electric utility system. The Constitution provides, in relevant part, as follows: Except as otherwise provided in this consti- tution, no . town . described in this section shall be allowed to contract indebtedness for any purpose or in any manner which, including existing indebtedness, shall exceed an amount equal to the following per- centages of the average full valuation of taxable real estate of such. town . N.Y. Const. art. VIII, ~ 4. The Town may not contract indebtedness if such indebt- edness, together with existing indebtedness, would exceed an amount equal to seven percent (7%) of the average full valuation of taxable real estate of the Town. See id. at ~ 4(f). Should it be determined that the municipality could not completely finance the project within its debt limitation, or if it simply wishes to avoid raising its debt level for purposes of - 54 - the ceiling, it may seek to exclude the new debt from such limi- tation. The exclusion is not automatic, however. See N.Y. Local Finance Law ~ 123.00. Rather, it is subject to a favorable determination by the State Comptroller. The State Comptroller may allow an exclusion which is directly proportionate to the amount of net income produced by the project as long as that amount exceeds twenty-five percent (25%) of the costs of principal and interest. See N.Y. Local Finance Law ~ 123.00. The Town of Massena (which was in no danger of exceeding its constitutional debt limitation in connection with its acquisition of the Town's electric utility system), as a precautionary measure, applied to the State Comptroller for an exclusion of its utility indebtedness. The exclusion was granted by the Comptroller upon the conclusion that the debt to be incurred would be self-liquidating. Because sound financial practices dictate that rates for sales of electricity from the project be sufficient to provide net revenue to retire principal and interest on bonds issued for the project in order to make those bonds marketable, the Town may be able to avail itself of such an exclusion, and thereby avoid increasing its debt, for purposes of the constitutional debt limitation. 6. Operation of the Municipal Electric Department. In their Engineering Overview Study Establishing a Municipal Electric Utility for the Town of Southold, R.W. Beck & Associates provided a clear overview of the Organization, Personnel and Facilities necessary for the establishment of the - 55- Electric Department. We concur in all of their observations, and would add only the few comments below. Under the New York Public Service Law, the Town of Southold, having undertaken to serve customers within its boundaries, must continue to provide safe and adequate service. See N.Y. PSL S 65(1). All rates and charges for service must be just and reasonable and nondiscriminatory. Id., § 65(1) and (2). Subject to regulation by federal or state regulatory 39/ bodies, the method of operation of and the rates, rentals, and charges for electric service, and the procedures for billing and the collection of rates must be determined by the Town Board. N.Y. Gen. Mun. Law ~ 360(7). Section 360(7) of the N.Y. General Municipal Law implies that the legislative body of the municipality should retain operational control of the system once it is estab- 40/ lished. This conclusion is strengthened by Section 363, which directs the municipal's legislative body to use, insofar as is practical, the "same officers or boards as [used in] other authorized public improvements" for the purchase, acquisition, lease and construction of a public utility service. A separate method, authority or agency may be authorized for the purchase, 39/ See Section V, infra. 40/ N.Y. Gen. Mun. Law ~ 363. - 56 acquisition, leasing, and construction of the system, 41/ as long as it is set out in the ordinance or local law permitting the 42/ acquisition of the utility system. Once the municipal corporation obtains a bulk power supply, any surplus power beyond that required by the municipality and its residents may be sold outside the municipal corporation to persons, public or private corporations, or other 43/ municipal corporations. Moreover, a municipality may extend public utility service within the territory of another municipal corporation, if such other municipality is authorized under Section 360 to exercise the powers therein. The new service must be approved by the Public Service Commission. 44/ 41/ 42/ 43/ In the event that the legislative body of the municipality elects to establish an independent or separate operating agency or commission, a caveat is raised by the decision in Tierney v. Cohen, 268 N.Y. 464, 198 N.E. 225 (1935), dis- cussed above, in connection with the financing of the facilities to be acquired. While the legislative body may create a new board, commission or agency to effectuate the establishment of a public utility, all financing of the facilities to be acquired and capital improvements made thereafter with the proceeds of general obligation bonds must be accomplished through the issuance of the general obligation bonds of the Town; the faith and credit of the municipal corporation, as opposed to that of a separate agency or commission, must be pledged to secure the bonds. N.Y. Gen. Mun.. Law S 360(3). N.Y. Gen. Mun. Law ~ 361(1). AS discussed below, however, power obtained through the Power Authority of the State of New York cannot be resold to a-third party for the purposes of resale by that party. 44/ N.Y. Gen. Mun. Law S 361(1). - 57 - Town Municipal System~ With Contracted-For Operation by the Village of Greenport. Under this alternative structure, the Town would establish a municipal system as outlined above, but would also enter into a contract with the Village of Greenport's Electric Department ("GED") which would provide that management of the Town's Electric Department would be undertaken by the GED. Procedure for Establishing System and Approving Contract. The procedures for establishing the Town's municipal utility under this scenario are identical to those outlined above. In addition, however, there are certain procedures required to be followed to ensure adequate approval by both municipalities of the proposed contract. Section 361(2) of the N.Y. General Municipal Law provides for agreements to be made between municipal corporations for the operation of joint public utility services. It states that: (2) Agreements may also be made between two or more municipal corporations, auth- orized as provided in this article to exer- cise the powers specified in the preceding section, for the joint ownership, leasing, construction, acquisition, use or operation of a public utility service, within the com- bined territorial limits of such contracting parties. The method of operation of and the rates, rentals and charges for such service and the procedure for their collection shall be fixed by such agreements. Any such agreement must be formalized under the provisions of - 58 45/ section 119-o of the N.Y. General Municipal Law. See also Op. State Compt. 78-656. Together, these provisions allow municipal corporations to enter into agreements to accomplish together what they are legally permitted to do separately. See 25 Op. State Compt. 873 (1968). Section 119-o provides in pertinent part: S 119-o. Performance of municipal cooperative activities; alternative powers 1. In addition to any other General or special powers vested in municipal corpora- tions and districts for the performance of their respective functions, powers or duties on an individual, cooperative, joint or con- tract basis, municipal corporations and dis- tricts shall have power to enter into~ amend~ cancel and terminate agreements for the per- formance amonq themselves or one for the other of their respective functionst powers and duties on a cooperative or contract basis Sections l19-m - oo of the General Municipal Law govern inter-local cooperation. They do not supplant the authority granted to municipalities under ~ 360-361, as the statute provides: The provisions of this article are designed to effectuate in part (1) section two-a of article eight of the constitution and (2) section one of article eight of the constitution as amended January first, nineteen hundred sixty, and shall be in addition to and not in substitution for or in limitation of any other authorization for perform- ance by municipal corporations or dis- tricts of their functions, powers or duties on a cooperative, joint or contract basis. N.Y. Gen. Mun. Law ~ l19-m (emphasis supplied). This law was enacted in 1960, while ~ 360-361 were enacted in 1934. Thus it must be presumed that the Legislature was aware of the existence of the municipal cooperation provision for utility services when ~ l19-m was enacted. - 59 - or for the provision of a joint service or joint water, sewage or drainage project (emphasis supplied). Section 119-o(c) permits these functions to be conducted beyond the territorial limits of the municipal corporation, which the Village would do in this case. See Op. State Compt., 80-732 (town contracted with village for village to operate town's ski area). This section also includes requirements for the approval of any such contract by both municipalities: Any agreement entered into hereunder shall be approved by each participating municipal cor- poration or district by a majority vote of the voting strength of its governing body. Where the authority of any municipal corpor- ation or district to perform by itself any function, power and duty or to provide by itself any facility, service, activity, project or undertaking or the financing thereof is, by any other General or special law, subject to a public hearing, a mandatory or permissive referendum, consents of govern- mental agencies, or other requirements appli- cable to the making of contracts, then its right to participate in an agreement here- under shall be similarly conditioned. N.Y. Gen. Mun. Law, Section 119-o(1) (emphasis supplied). The procedures for approval of the contract will be different in the Town and in the Village. In both municipalities, the agreement, which should include all terms and conditions, duties, methods and rate of compensation, and all other pertinent information, must first be approved by the municipality's governing body, in Southold by the Town Board, and in Greenport by the Village Board of Trustees. Whether a referendum must be held depends upon the requirements - 60 - of the underlying law, pursuant to ~ 119-o(1). The authority of the Town to enter into a contract for the establishment and operation of a municipal electric utility system is found in N.Y. General Municipal Law ~ 360. Subsection 3 of that Section requires that the "proposed method of constructing, leasing, purchasing, acquiring" the plant and facilities for electric service, and the cost thereof, be submitted to the electorate for approval in a referendum, following the approval of the Town Board. N.Y. Gen. Mun. Law ~ 360(3). The method of operation of the Town's utility system is not subject to a referendum, however. It appears, therefore, that a contract with the GED to operate the Town's. system would not need to be included in the referendum to be held by the Town on the question of whether to acquire LILCO's distribution system. The precedent that exists on the question of whether it is necessary to submit the contract to the electorate of the Town for approval confirms this view. One case does imply that a referendum is necessary for approval of financing of the project. In 1975, the New York Attorney General was asked whether a town and a village could jointly establish a dog pound. The Attorney General issued an opinion stating that they could, under ~ 119-o of the General Municipal Law and the statute which empowers individual municipalities to establish dog pounds. Op. Att'y Gen. (Inf.) 295 (1975). He also indicated that no referendum was required, unless the two municipalities decided to finance the project through a bond resolution with a maturity of over five years. In - 61 - that case, it would be subject to a permissive referendum under S~ 35.00 and 36.00 of the Local Finance Law. Id. at 297. In 1949, however, the State Comptroller issued an opinion indicating that a Town may contract with a private firm for the evaluation of real estate in the town, and that no referendum was required on whether the contract should be let. See 5 Op. State Compt. 426 (1949). In another case, the Comptroller ruled that a referendum would not be required on a bond issue where it was for a system improvement to an extant public utility service. 2 Op. State Compt. 582 (1946). In a case involving a proposal to improve natural gas facilities, the Comptroller found that since the municipal gas system had already been established improvements were legal without resort to a referendum, and he went on to find that the referendum requirement of ~ 36015) was only for the establishment of the utility system. 2 Op. State Compt. 556 (1946); see also 33 Op. State Compt. 95 (1977). Because the Town is required to hold a referendum to decide whether to establish a municipal system in the first place, however, and may hold a permissive referendum to approve the issuance of bonds to finance the acquisition of the facili- ties, it would seem prudent to include a provision concerning the contract for the operation of the electric system by the GED on the referendum ballot. The Village must approve the contract by a majority vote of the voting strength of the Board of Trustees. Again, while it is not absolutely certain under New York law, it appears -62- that because no referendum is required to approve the form of operation of a municipal utility under ~ 360 of the N.Y. General Municipal Law, no referendum would be required to ratify the Board of Trustees decision to permit the GED to operate Southold's system. 2. Acquisition of LILCO's Distribution Systemr and Financinq for the Project. The acquisition and eminent domain proceedings under this alternative would be identical to those described in Section II.A.2 above, as the Town would still be the proposed owner of LILCO's condemned distribution system. tives would also be the same as those II.A.5. The financing alterna- discussed above in Section 3. Operation of the Municipal Electric Department. As noted above, the Town Board of Southold, which would own, if not run, the Southold System, is charged under New York law with the responsibility for setting rates and charges for electric service, as well as the operation of the system and the collection of bills. See N.Y. Gen. Mun. Law ~ 360(7). In order to fulfill these obligations, the Town would need to clearly specify in its contract with the GED the limits of the Village's authority and the oversight powers of the Town. In order to comply with N.Y. General Municipal Law S 361(2), which requires that the method of operation and terms of service and charges therefor be fixed in the agreement, the terms and conditions of, as well as the compensation for, the GED's performance, and the rates, charges, terms and conditions of electric service to - 63- Southold customers must also be specifically included in the agreement. Section 119-o(2) of the N.Y. General Municipal Law governs the agreements that would be drafted by the Town and Village. It provides for a high degree of flexibility, permitting the following jointly delegated activities and responsibilities, among others: b. The manner of employing, engaging, compensating, transferring or discharging necessary personnel . . . the making of employer's contributions for retirement, social security, health insurance, workmen's compensation and other similar benefits provisions that for specific purposes desig- nated officers or employees of the joint service . shall be deemed those of a specified participating corporation or district; and provisions that personnel assigned to a joint service . shall possess the same powers, duties, immunities and privileges they would ordinarily possess (1) if they performed their duties only in the corporation or district by which they are employed or (2) if they were employed by the corporation or district in which they are required to perform their duties. c. Responsibility for the establish- ment, operation and maintenance of the joint service . . . and the officers responsible for the immediate supervision and control thereof; the fixing and collecting of charges, rates, rents or fees, where appropriate, and the making and promulgation of necessary rules and regulations and their enforcement by or with the assistance of the partici- pating corporations and districts d. Purchasing and making of contracts subject to general laws applicable to municipal corporations and school districts. e. Acquisition, ownership, custody, operation, maintenance, lease or sale of or personal property. real - 64 i. Manner of responding for any liabilities that might be incurred in the operation of the joint service . . and insuring against any such liability. j. Procedure for periodic review of terms and conditions of the agreement, including those relating to its duration, extension or termination. the k. Adjudication of disputes or disagreements, the effects of failure of participating corporations or districts to pay their shares of the cost and expenses and the rights of the other participants in such cases. 1. Other matters as are reasonably necessary and proper to effectuate and progress the joint service. Under this provision of the General Municipal Law, the Town and Village could develop an agreement that would provide for all facets of the operation of the Southold system by the GED. While we have had no experience with a contract of this nature, it seems clear to us that a contract between the Town and the GED cannot be too specific or detailed, and the greatest attention and care must be given to its negotiation, drafting, and execution. e Advantages and Disadvantages of this Alternative Structure. The overall advantages to the Town of this alternative structure are several. The Town would own its municipal system, and so would have greater control over its energy supply future. Through its contract with Greenport, the Town would be able to direct how the utility would be operated, but would also - 65 - benefit from the expertise and experience of the Village's Electric Department. As long as the contract were drafted carefully and with an eye to avoiding contract disputes, this joint undertaking would, overall, probably be advantageous to the Town. There is one possible disadvantage, however, and it is a major one. If the GED operates the Town's System, it could be argued that Southold is not a true municipal utility because it has delegated the day-to-day control over its system to another entity. In that case, it could be argued, the Town would not qualify for a municipal preference under the Niagara Redevelopment Act.. It is our opinion that these arguments could be avoided by the clear reservation to the Town, in the contract for operation of the System, of full, ultimate control of the system by the Town Board. The Village of Greenport would benefit from this contractual arrangement as well, to the extent that they would be compensated under the contract, and also to the extent that the contract would permit the taking advantage of economies of scale in terms of materials, supplies, and labor operations between the two municipal utilities. The Village would retain autonomy and control over its electric department and its PASNY hydropower allocation would remain undisturbed. There would be no change in the overall functioning of its system. Aside from potential contractual disputes, and the potential argument discussed above that the Town would not qualify for a municipal preference, which can be avoided through - 66 - careful drafting, there seem to be no disadvantages inherent in this alternative structure. C. Town Municipal System~ Merged with the Greenport Electric System. Under this scenario, the Town of Southold would establish a municipal utility system, as outlined above. Once established, Southold's electric department would merge with the GED, either before or after condemning LILCO's distribution facilities in the Town exclusive of the Village's service territory in Greenport and School District No. 10, forming a joint utility serving the combined service territories of Southold, Greenport, and School District No. 10. 1. Establishment of a Joint System After the Acquisition by Southold of LILCO's Distribution System. The rationale for effecting a merger after the acquisition by the Town of LILCO's system is primarily to avoid any financial liability on the part of the Village of Greenport for the condemnation and acquisition of LILCO's system. Under this scenario, Southold would need first to establish a municipal utility system as outlined above, through a Town Board resolution and a referendum of the Town electors. It would then condemn LILCO's distribution system, following the eminent domain procedures under New York Law described above, and finance the acquisition, without participation of the Village, through issuance of bonds as outlined in the financing section of Section II.A of this study. It would then negotiate an agreement - 67 - 46/ with the Village of Greenport for a merger of the systems. Such agreement could, as discussed above, be approved by vote of the Town Board, but may, as well, be presented to the electors for approval at the same time as the referendum. For its part, the Village of Greenport, having already established its utility system, would need only to approve the merger by approving the joint utility service agreement drafted by the Town and the Village. That approval would be effected by the affirmative vote of a majority of the Village Board. See N.Y. Gen. Mun. Law § 119-o. No referendum would be required, as the referendum under ~ 360(6) of the N.Y. General Municipal Law is required for the establishment or acquisition of a utility service, not its expansion. The joint agency agreement approved by both the Town and Village would necessarily be of a different nature than merely a contract for the operation of one system by another. It should include all of the powers discussed in the preceding section that are authorized by the interlocal cooperation statute, ~ 119-o of the N.Y. General Municipal Law, but also should reflect another provision featured in ~ 119-o. Subsection (2) (a) of that section provides that the agreement may stipulate: (2) (a). A method or formula for equi- tably providing for and allocating revenues and for equitably allocating and financing the capital and operating costs, including payments to reserve funds authorized by law Such a merger combining the service territories is permitted by Section 361(2) of the N.Y. General Municipal Law. See supra at 54. - 68 - and payments of principal and interest on obligations. Such method or formula shall be established by the participating corporations or districts on a ratio of full valuations of real property, or on the basis of the amount of services rendered or to be rendered, or benefits received or conferred or to be received or conferred, or on any other equi- table basis, including the levying of taxes or assessments to pay such costs on the entire area of the corporation or district, or on a part thereof, which is benefited or which receives the service. N.Y. Gen. Mun. Law § 119-o(2) (a). Separate rates should be designed for the Town and for the Village, for two main reasons. First, the Village of Greenport has received an allocation of PASNY hydropower, which it must sell at rates set by PASNY under N.Y. Public Authority Law § 1005. This allocation permits the Village to sell electricity at a lower cost than could the Town. This advantage to the Village should be "grandfathered" into the new two-tier rate structure, perhaps by designing a purchased power clause to track through the PASNY power as a credit to the rates charged to Village customers. Secondly, because the Village of Greenport has owned and operated its electric system since 1899, the GED system's rates reflect the depreciated original cost of its system and should remain lower than the rates of the proposed Town system, which would reflect the acquisition cost of a distribution system at current interest rates. Additionally, operating and mainten- ance and administrative and general expenses may well be incurred at different levels by the Town and the Village. The agreement should therefore stipulate the equitable division of costs and - 69 - charges for electric service to the Town and to the Village customers, and should set a just and reasonable rate for each. Dual rate structures similar to the one proposed have long been recognized as just and reasonable. Section 65 of the N.Y. Public Service Law, which applies to municipal electric systems, prohibits municipally owned electric corporations from charging unjust or discriminatory rates. That same section, however, permits electric companies to establish customer classifications and to charge differing rates to different classes, provided that Public Service Commission approval is obtained. See N.Y. PSL ~ 65(5). The classifications and the rates imposed must have a rational basis. See New York State Council of Retail Merchants v. PSC, 45 N.Y.2d 661, 669, 412 N.Y.S.2d 358, 362, 348 N.E.2d 1282 (1978); Lefkowitz v. PSC, 40 N.Y.2d 1047, 1048, 392 N.Y.S.2d 239, 240, 360 N.E.2d 918 (1976). It is generally accepted, for example, that a municipally owned electric company may distinguish between resident and nonresident customers and charge different rates to these classes. See Bteick v. City of Papillion, 219 Neb. 575, 365 N.W.2d 405, 407 (1985) (water and sewer service); 64 Am. Jur. Public Utilities ~ 120 at 647 (1972); Annot., 4 A.L.R.2d 595, 604 (1949). This is particularly true where the rate differential is based on different costs of providing service to the different classes of customers. See 64 Am. Jur. Public Utilities ~ 120 at 647 n.14. The cost of providing service to customers in Greenport and in Southold would be different due to the underlying cost of the facilities used in providing the service. - 70 - As early as 1935, the N.Y. Public Service Commission determined that a municipal electric company could charge different rates to different customer classes, specifically to resident and nonresident customers. See Customers of Electricity v. Boonville, 8 PUR NS 493 (N.Y. PSC 1935). As long as the Town and Village clearly establish in their rates the factual basis for the different customer classifications, separate rate structures may be created. See Town Board of Town of Poughkeepsie v. Poughkeepsie, 255 N.Y.S.2d 549, 552 (1964). The agreement should also clearly provide for a unified electric department board and management structure that would represent the interests of both the Town and the Village. To this end, thoughtful and thorough negotiations should take place prior to the drafting of the final agreement. 2. Establishment of a Joint System Prior to the Acquisition by Both the Town and the Village of LILCO's Distribution System. Under this alternative, the Town of Southold would establish a municipal system as outlined above, through a Town Board resolution and a referendum of the Town electors. Voter approval for the acquisition of and financing for a condemnation of LILCO's distribution system would also be obtained in a referendum, as described above. An agreement for a merger of the Town's new system with the GED would be negotiated with the Village and drafted, and approved, by the Town Board. All of these steps would be taken prior to the commencement of negotiations with LILCO for the purchase of its distribution - 71 facilities within the Town or the initiation of a condemnation action and eminent domain proceedings under the EDPL. The agreement negotiated with the Village would provide not only for a joint agency that would operate the combined electric departments jointly (although still setting a separate rate structure for each), but also for the joint acquisition, through negotiation or condemnation, of LILCO's facilities and financial responsibility for the amortization thereof. Under N.Y. Gen. Mun. Law § 119-o(2) (a), the agreement can equitably apportion these costs and liabilities. The agreement estab- lishing the joint agency must permit the agency to condemn property, including, but not limited to land, generation and transmission facilities. It might be preferable to have the joint agreement provide for paying, on a pro rata basis, the cost of condemnation, including actual property cost and litigation expenses for the collective joint action agency's use. The Village would be required to follow the same approval process as the Town. Section 360(2) of the N.Y. General Municipal law permits any municipal corporation to "construct, lease, purchase, ownr acquire, use and/or operate any public utility service within or without its territorial limits" (emphasis supplied). Subsection (3) of that section provides that: The proposed method of constructing, leasing, purchasing, acquiring, the plant and facilities for such service, together with both the maximum and the estimated costs thereof, and the method of furnishing such - 72 - service shall be fixed by a village ordinance or local law in the case of a village. 47/ N.Y. Gen. Mun. Law S 360(3). In order for the Village to exercise these powers, even jointly with the Town, it must follow the required procedures. The Village ordinance or local law must then be approved by the Village electorate at the next general election not less then ninety days after the adoption of the ordinance, or at a special election called for that purpose. See N.Y. Gen. Mun. Law ~ 360(5). The agreement would also require the approval of the Village electors. Section 119-o provides that approval of the munici- pality's electors is required where the actions to be taken jointly would be required to be approved by the municipality's electors if undertaken unilaterally. See N.Y. Gen. Mun. Law § 119-o(1). Under this alternative, therefore, the Village would also be required by statute to submit the agreement to the Village electors in a referendum. Both the Village ordinance 47/ Although the Village Law of the State of New York normally requires notice and a hearing prior to the adoption of a village ordinance, see Village Law § 20-2002, the New York Court of Appeals has held that Section 360 of the General Municipal Law, which omits a hearing requirement, governs the adoption of an ordinance authorizing establishment of a municipal utility system, such that no hearing is required in such circumstances. See O'Flynn v. Village of East Rochester, 292 N.Y. 156, 54 N.E.2d 343, cert. denied sub nom. Despatch Shops, Inc. v. Village of East Rochester, 323 U.S. 713 (1944). Insofar as a hearing is required as part of the eminent domain process, however, counsel recommends that a single hearing be utilized as a forum to discuss the full scope of actions contemplated by the municipality. -73 - approving acquisition of the facilities and the Village Board's vote approving the agreement providing for a joint electric department may be presented to the electorate in the same referendum. Although there is no instructive precedent on this issue, it appears that the hearing required by N.Y. EDPL S 203 could be conducted jointly by the Town and Village. The delegation of condemnation authority under N.Y. Gen. Mun. Law ~ 360(6) can be read to extend to joint action under N.Y. Gen. Mun. Law ~ 361(2). This would allow the Town and Village jointly to: 1) issue findings after the hearing; 2) provide only one report; and 3) specify the public use and benefits, location, effects, and other factors involved in the project. See N.Y. EDPL ~ 204. This determination is, of course, subject to judicial review. See N.Y. EDPL ~ 207. In addition to the discussion on financing of the project in Section II.A. above, the following issues should be noted. If the Town and Village merge their electric departments prior to instituting condemnation proceedings, a clear ~nder- standing will have to be reached concerning the proportional financial liability of each municipality. The New York Local Finance law provides great flexibility in how the indebtedness for the contract may be incurred. Section 15.00 provides: (c) Power to contract indebtedness; joint services and joint projects: 1. Municipal corporations. Two or more municipal corporations which have agreed to -74 provide a joint service, either directly or on behalf of a district, pursuant to article five-G [§ 119] of the General municipal law, or pursuant to any other law enacted by the legislature~ may contract either joint indebtedness or several indebtedness to pro- vide for such joint service. Such indebted- ness shall not be contracted, however, unless there is an applicable period of probable usefulness prescribed in paragraph a of section 11.00 of this chapter under which each of the participating municipal corpor- ations, acting separately, either directly or on behalf of a district, could have issued obligations pursuant to this chapter. 3(b) A municipal corporation shall not contract indebtedness for a joint service, and a municipality shall not contract indebtedness for a joint water, sewage or drainage project, to a qreater extent than it is authorized by law to spend money for any such service or project and provided also that this section shall not relieve any such unit of government of any duty imposed by law to include in its annual budget or tax levy or otherwise to pay from current funds all or part of any expenditure that it may make for any such service or project. (c) Where the agreement between the municipal corporations or municipalities in relation to any joint service or any joint water, sewage or drainage project does not provide that the indebtedness which is to be contracted is to be joint indebtedness~ the amounts of indebtedness which are to be con- tracted severally by the parties to the agreement shall be in the proportions speci- fied in the agreement. Where the agreement does not provide how the indebtedness shall be contracted and the parties cannot other- wise agree, the indebtedness shall be contracted as joint indebtedness. (n) Where any action is taken in relation to joint indebtedness for which the joint faith and credit of the participating municipal corporations or municipalities - 75 - would be pledged, or in relation to obliga- tions issued pursuant to this chapter, the finance boards of each of the participatinq municipal corporations or municipalities must separately authorize such action to be taken, except as otherwise provided in subparagraphs (1) and (m) of this subdivision. Such separate authorization by each such finance board shall be subject to the provisions of this chapter, and of local laws enacted pursuant to this chapter, which would be applicable in the event that the object or purpose in relation to which action is being taken was the object or purpose solely of the county, city, town, village or school district which the finance board represents. N.Y. Local Finance Law S 15.00(c) (emphasis added). This section permits municipal corporations to contract indebtedness for authorized joint services, such as municipal electric services. Id. § 15.00(c) (1). The limitations imposed concern the level of indebtedness and the method by which bonds could be issued. A bond resolution would need to be adopted by each municipality, setting forth: 1) the purposes of issuance; 2) the estimated maximum cost; 3) whether maturity will be longer than five years; 4) whether appropriated funds will be needed; and 5) a financing plan. N.Y. Local Finance Law ~§ 31.00, 32.00. In the case of utility projects, the resolution must specify a maximum con- tracted indebtedness period of no more than thirty years. See N.Y. Local Finance Law ~ ll.00(a) (5). After approval by the Village and Town Boards, a referendum would possibly be required in both the Town and Village. See N.Y. Local Finance Law ~§ 33.00, 35.00, 36.00, 63.00, 102.00 and 123.00; N.Y. Gen. Mun. Law ~ 360(5); see also Niagara Mohawk Power Corp. v. Town of Massena, 92 Misc. 2d 587, 76 - 400 N.Y.S.2d 430 (1977). As discussed above, a referendum is generally required when a municipal corporation seeks to incur certain types of indebtedness. This referendum could take place at the same time as the referendum on the establishment of a joint system and the acquisition of the LILCO facilities. Bonds cannot be issued by the joint agency in its own name, without pledging the credit of the municipal corpora- tions. Accord Tierney v. Cohen, 268 N.Y. 464, 198 N.E. 225, aff'd sub nom. N.Y. Edison Co. v. New York, 268 N.Y. 669, 198 N.E. 550 (1935); see also New York State Electric and Gas Corp. v. City of Plattsburqh, 281 N.Y. 450, 24 N.E.2d 122 (19119); New York Edison Co.~ Inc. v. City of New York, 268 N.Y. 669, 198 N.E. 550 (1935). The State Comptroller has ruled, in a comparable situation, that the governing body of a joint sewer project could not issue bonds, though the Town and Village could issue such bonds and they would be jointly liable. 30 Op. State Compt. 142 (1974). Of course, there is a constitutional debt limit of seven percent of the full valuation of taxable real estate of any town or village. See N.Y. Const. article VIII, § 4(f) and (g); see also N.Y. Local Finance Law ~§ 15.00(c) (3) (n) and 63.00. Exemptions from the debt limit can be obtained from the State Comptroller in order to exclude the new indebtedness from the calculus of total debt permitted, where a revenue-producing property (such as an electric utility) is involved. In these circumstances, it must be demonstrated to the satisfaction of the Comptroller that the indebtedness will be self-liquidating. See -77 82-212. Other methods of financing the projects available. While PASNY, which sets the rates for Local Finance Law ~ 123.00(g)-(j); see also Op. State Compt. are certainly the resale of power from its projects, might raise an issue with the use of internally-generated funds for a project, it is a possibil- 48/ ity. Earning a fair return on municipal utility property is constitutionally sanctioned, as is maintaining "necessary and proper reserves" or even "using such profits for any other lawful purpose." N.Y. Const. article IX, ~ l(f). The development of joint projects for purposes of supplying electricity to the combined municipalities is a lawful purpose. The difficulty in Since PASNY regulates retail rates, at least to the extent PASNY-generated power is involved, PASNY could make it dif- ficult for the Town and Village to use internally-generated funds for a joint project. PASNY could attempt to assert that use of this funding is actually based on excess revenues, and thus Niagara Project preference power is not being provided to rural and domestic consumers "at the lowest possible price." N.Y. Pub. Auth. Law ~ 1005(5). On the other hand, the New York Constitution provides: (f) No local government shall be pro- hibited by the legislature (1) from making a fair return on the value of the property used and useful in its opera- tion of a gas, electric or water public utility service, over and above costs of operation and maintenance and necessary and proper reserves, in addition to an amount equivalent to taxes which such service if privately owned, would pay to such local government, or (2) from using such profits for payment of refunds to consumers or for any other lawful purpose. Article IX, § 1. - 78 - this situation, of course, is the extremely expensive nature of the acquisition. The merged electric departments would operate as one, pursuant to the terms of that merger agreement, for the purposes of operations, maintenance, repair, service, billing, and other functions. 3. Advantages Village of and Disadvantages to the Town and the this Alternative Structure. a. Southold. the exception of a reduced amount of Town control with over the Town's new municipal system due to the joint agency arrangement with Greenport, we could identify no disadvantages to this arrangement for the Town. Moreover, we have noted several benefits to the Town that would be provided by one or the other arrangement under this alternative. If the Town system merged with the Village system either before or after acquisition of LILCO's distribution system within the Town, the Town would benefit from the economies of scale that would occur in operation and maintenance expenses and administrative and general expenses, as well as shared personnel, line crews, and general plant. It would also benefit from the expertise the Village has attained in operating a municipal system. The Town could benefit from various coordinated peak- shaving activities by running generating units (the combustion turbine in Southold, and GED's diesels) within the new combined municipal system. If LILCO's distribution system were acquired after the merger of the two systems, the Town could also benefit on the - 79 issue of financing. Because both municipalities must pledge their credit in order .to finance a joint acquisition, see discus- sion supra at II.C.2, the Town would have the further advantage of the Village's valuation, up to its debt limitation, rather than relying solely on the Town's own debt limitation, for the purpose of issuing bonds. See N.Y. Local Finance Law ~ 15.00(c) (3) (e), 63.00; N.Y. Const. art. VIII, § (4) (f) and (g). b. Greenport. The advantages to Greenport of either arrangement under this alternative would consist mainly in the economic advantages realized by combined operations and economies of scale, and the potential for peak shaving. There are, however, several serious disadvantages to Greenport of creating a joint municipal utility with the Town of Southold. First is the fundamental disadvantage of losing control over its electricity service, and having to compromise in the operation of the combined systems. Second, Greenport now oper- ates at a higher, and thus more efficient and less expensive, load factor than Southold would. Third, Greenport may have to pledge indebtedness for the purchase of the LILCO System. Fourth, and most important is the question of Greenport's allocation of PASNY power. While the agreement between the Town and the Village should preserve the advantages of Greenport's PASNY hydropower allocation by establishing rates for the Village's customers that would reflect the lower rates, there is no guarantee that PASNY would continue to view the now-combined service territory as the 80 - same municipal utility which had earlier received a preference allocation. It is not inconceivable that PASNY could require that the allocation now be spread among all ratepayers. This action would significantly dilute the price advantages of the allocation, with the result that Greenport customers would pay substantially higher rates than they currently do. Given the above conclusions, it appears unlikely that Greenport would agree to jointly establish a municipal electric system with Southold. D. Expansion of Greenport's Electric System to the Boundaries of the Town. 1. Procedures and Problems for the Expansion of Greenport's System. Under this alternative, a municipal electric system could be established in the Town of Southold, including Marion and Orient, by the expansion by the Village of Greenport of its existing electric system to the boundaries of the Town of Southold, and the acquisition by Greenport of LILCO's distribu- tion system within the Town. While we have included this option in this study, it is not clear under New York law that the Village is empowered to condemn LILCO's facilities outside the Village's boundaries. Section 360(2) of the New York General Municipal Law provides in pertinent part: · any municipal corporation may construct, lease, purchase, own, acquire, use and/or operate any public utility service within or without its territorial limits, for the purpose of furnishing to itself or for compensation to its inhabitants, any service similar to that furnished by any public - 81 - utility company specified in article four of the public service law. (Emphasis supplied.) Section 361(1) of that Law provides: 361(1) Service beyond territorial limits Whenever a surplus of such public utility service exists over the amount thereof required by the municipal corporation and the residents thereof, such municipality may sell such surplus outside the municipal corporation to persons, public or private corporations or other municipal corpora- tions. Any such municipal corporation~ by agreement with any other municipal corpora- tion which is authorized to exercise the powers specified in the preceding section~ may extend such service to such other muni- cipal corporation under such terms and con- ditions as may be agreed upon between them provided that if at the time of such exten- sion, a public utility service is actually being furnished in such other municipal corporation, such extension shall not be effected without the approval of the public service commission. (Emphasis supplied.) While a municipal utility may thus condemn facilities outside its territory to serve its inhabitants, and may use its facilities within its territorial limits to serve consumers in other municipalities with their consent and that of the Public Service Commission, there does not appear to be precedent under New York law for the extraterritorial condemnation of facilities by one municipality for the sole purpose of serving another rather than for serving itself or its inhabitants. Thus far, no New York courts have been asked to interpret ~ 361 of the General Municipal Law. There has been one relevant State Comptroller's Opinion, which found that under 361(1) as long as a town was acting in good faith to serve its residents it could purchase a natural gas public utility service - 82 - even though its residents would be using only 33-40 percent of the natural gas, with the remainder sold to others outside of the community. Op. State Compt. 80-782. In this case, the Comptrol- ler found that purchase of the entire utility by one town was proper, despite the fact that the utility served a total of 13 towns and 8 villages. Id. Thus, there is at least persuasive authority to support the view that a qualified municipal corpor- ation under N.Y. Gen. Mun. Law ~ 360, et seq., can purchase, if not condemn, property well beyond its territorial limits. An argument can be made that, because both LIiLCO and Greenport hold non-exclusive franchises to serve the area known as School District No. 10, condemnation of LILCO's facilities--in that area at least--will be for the purpose of serving its own customers. However, caution should be exercised in considering this approach, as the law is not clear or settled about whether the Village can undertake such a condemnation project, and lengthy litigation should be expected as a result. If Greenport chose to pursue this approach, the Village Board of Trustees would first be required, under ~ 360(3) of the General Municipal Law, to pass an ordinance approving the pro- posed expansion of Greenport's system and the acquisition of LILCO's facilities. The ordinance or local law would be required to be ratified by a referendum under ~ 360(5). The full proce- dures, including hearing, condemnation action, and judicial review under the N.Y. EDPL outlined above at Section II.A.2, for the Town of Southold, would also be required to be followed by the Village in this case. - 83 In addition, the Village would need to obtain the approval of both the Town and the New York Public Service Commission before service could be provided. N.Y. Gen. Mun. Law ~ 361; N.Y. PSL ~ 68. Indeed, consent of the local municipality is a condition precedent to issuance of a certificate by the PSC, and proof of consent must be provided. It appears that a duly adopted resolution of the Town Board would suffice. Village of Chateauguay v. Public Service Comm., 255 N.Y. 232, 174 N.E. 637 (N.Y. 1931) (withdrawal of consent proved by resolutioni~. No referendum is required or permitted. A hearing must be held by the PSC. See N.Y. PSL ~ 68. It is not anticipated that Southold's approval would be an issue under this alternative. 2. Financinq Issues. If the Village of Greenport were to condemn LILCO's distribution facilities within the Town of Southold, it would be required to finance the acquisition through the issuance of bonds as outlined in Section II.A.5, above. However, as discussed earlier, the New York State Constitution places a limitation on the indebtedness that can be incurred by a village, of seven percent of the average full valuation of taxable real estate of that village. See N.Y. Const. art. VIII, ~ 4(g). A preliminary valuation of LILCO's system, plus the costs associated with setting up the municipal system, amount to approximately $24 million. Without being certain of the Village's average full valuation of taxable real estate, it seems likely that the Village couid not satisfy this Constitutional requirement. While an exemption from this provision can be obtained, it is only - 84 granted on a discretionary basis by the State Comptroller, as noted above. See N.Y. Local Finance Law ~ 123.00. This constitutional debt limitation should be carefully examined in the context of this undertaking. 3. Advantages and Disadvantages of this Alternative Structure. a. Southotd. The advantages to Southold under this alternative are several. While it would not have absolute control over the municipal system that would be providing service to it, it could, under ~ 361, condition its agreement to be served by Greenport in such a way as to retain some influence over the operation of the system. Southold would obviously benefit from the GED's expertise in operating an electric system. Because Southold would not be the sole, or even a joint, condemnor, it would not be required to pledge its credit or undertake any indebtedness for this project. While Greenport would almost certainly insist on a dual rate schedule to preserve its PASNY hydropower allocation for customers of the Village's electric department, Southold would benefit from an expected request for an increased PASNY allocation by Greenport if and when further PASNY power becomes available. Southold would also benefit from any economies of scale realized by the operation of the municipal system in two municipalities. Finally, Southold could condition its agreement to be served by Greenport on payments by Greenport to Southold in lieu of taxes, so that Southold will not be disadvantaged by the loss of tax revenues from LILCO. - 85 b. Greenport. There are advantages and disadvantages to this alterna- tive for Greenport. Greenport would be financially indebted to a degree that would inhibit further undertakings that would require the issuance of debt for years into the future. The Village would need to request an expanded allocation of PASNY power that could be used to benefit Southold customers, as Southold (which would not run its own distribution system) would not qualify as a preference customer. Greenport would run the risk, if no further allocation were made available, of having to share its PASNY allo- cation with all customers on its system, thereby substantially diluting substantially the benefits of the low-cost PASNY power. On the other hand, the Village would, by establishing a dual rate system, be able to achieve greater margins than before to return to the system for improvements. The Village may also find the expansion appealing from a political or philosophical viewpoint, if it is still expansion-minded, as it appeared to be in 1980 when it expanded its service territory into School District No. 10. Finally, there are the advantages discussed above of reduced costs through peak-shaving activities and bulk power purchases, as well as reductions in operation, maintenance and administrative and general expenses due to economies of scale. III. FISHERS ISLAND. As part of this legal feasibility study, the Southold Town board has requested that we examine the legal aspects of and alternatives for establishing a publicly-owned electric - 86 - distribution system on Fishers Island, a geographically remote area which falls within the corporate limits of the Town of Southold. While much of the information set forth herein respecting acquisition procedures, bulk power supply, evaluation techniques, system operation, financing and utility regulation would be applicable in establishing a publicly-owned utility on Fishers Island, special circumstances and conditions on Fishers Island dictate that this subject be treated separately. This portion of the legal feasibility study is, then, a study within a study and our resulting of public power systems Island be considered as recommendation is that the establishment in the Town of Southold and on Fishers separate and discrete projects which may be pursued concurrently or independently. A. Background. Fishers Island, New York, is an island located in Long Island sound about 15 miles northeast of the northeastern tip of Long Island. It is much closer to Connecticut than to any other part of New York. Electric service is currently provided by the Fishers Island Electric Corporation (FIEC), a small investor owned electric company organized in 1935 under the New York transportation corporation law. The company's stock is held 51% by Fishers Island Utility Company, Inc., and 49% by Fishers Island Development. Corporation. FIEC provides service only on Fishers Island. It purchases its total requirements of power and energy at wholesale from the City of Groton Department of Utilities, to whose facilities submarine cable. (Connecticut) it is connected by a - 87 - We understand that the City of Groton has an allocation of power from the Niagara and St. Lawrence hydroelectric projects operated by the Power Authority of the State of New York (PASNY) that it receives through the Connecticut Municipal Electric Energy Cooperative (CMEEC) over the lines of Northeast Utilities Company. Northeast Utilities is interconnected at the New York- Connecticut border with other systems wheeling PASNY power. It is also our understanding that FIEC does not participate in or benefit from Groton's existing allocation of Niagara Project power. While its 1984 report to the New York Public Service Commission indicates that FIEC supplies power to about 800 meters on Fishers Island, the report states that the island's population is 400. We also understand that much of the population and resulting electric load are seasonal due to the number of summer estates and visitors. In 1984 FIEC purchased 4,125,726 kwh from Groton for which it paid $277,110, or about $.067 per kwh. Its total sales were of 3,520,027 kwh for which it received $573,324, or about $.163 per kwh. FIEC reported a net income in 1984 of $18,226, which was transferred to surplus. FIEC reported peak demands in 1984 in excess of 1200 kw. The peaks were reached several evenings in July, August and September. The report shows total assets of $1,127,047, including plant o~ $948,043, cash of $49,947, receivables of $48,947, and supplies on hand of $51,244. 88 - Liabilities include long term debt of $40,431, current liabilities of $35,579, reserves for depreciation of $469,712, surplus of $446,520, and capital of $130,049. Taxes paid in 1984 totaled $84,346. B. Projected Value of FIEC Facilities Based upon information extrapolated from filings made by FIEC with both the New York Board of Equalization and the New York Public Service Commission and interpreted by R.W. Beck and Associates, the facilities owned and operated by FIEC have a net book value of $478,000 based upon original cost less accumulated depreciation. According to Board of Equalization, information received from the New York the FIEC facilities located on the public ways have a reproduction cost new less depreciation value of $195,640. Using the same data obtained from the Board of Equalization, R.W. Beck and Associates calculates that the FIEC facilities located on private property have a reproduction cost new less depreciation value of $667,989. Thus, if the entire FIEC electric distribution system is appraised and valued exclusively under an RCNLD methodology, the system would have a current value of approximately $863,629. For reasons set forth below, we believe that the FIEC system should be acquired, if at all, in a negotiated purchase from the present owners at a cost which approximates the net book value of the existing facilities. For purposes of this analysis, we are assuming that the net book value of the Fishers Island system is approximately $478,000 and that a fair value, including - 89 - legal, engineering $550,000. C. and start-up or transfer costs will not exceed Orqanization Structure. Since Fishers Island is a part of the Town of Southold, the opportunity exists for establishing a publicly-owned electric system under any of the procedures and organizational structures identified and discussed in Section II of this Report. In addition, unlike the situation which prevails in the Town proper, we are of the opinion that it is both feasible, and probably more advantageous, to form a rural electric cooperative corporation on Fishers Island and to acquire, own and operate the distribution system as a separate and discrete entity rather than to attempt to integrate the acquisition of these facilities with a Town-wide municipal electric system in Southold. In connection with Fishers Island, we considered the following forms under which the ratepayers of Fishers Island might organize to own and operate a community utility: (1) An investor owned corporation like FIEC; (2) An independent municipal utility; (3) A part of another municipal utility, e.~. of the Town of Southold, the County of Suffolk, the Village of Greenport, or the City of Groton, Connecticut; (4) A rural electric cooperative. 1. Locally Controlled Investor-owned Utility. Apart from theoretically giving the ratepayers as shareholders more control over the utility, we see no advantages and a number of problems in undertaking to set up an investor 90 - owned utility of which the shareholders would be the ratepayers of the community. Such an entity, if practicable of creation, would offer none of the economic advantages of a municipal or cooperative utility and, in particular, would not be eligible as a preference purchaser of PASNY hydropower. 2. Independent Municipal Utility. Section 360 of the New York General Municipal Law authorizes municipal corporations to establish municipal electric utilities. (See full discussion in Section II, supra.) It provides that "municipal corporations" means counties, cities, towns and villages. Section 54 of the N.Y. General Construction Law provides: "The term village means an incorporated village." We are advised that Fishers Island, included within the Town of Southotd, is a hamlet or unincorporated village. Thus, Fishers Island is not qualified independently to establish a municipal utility under ~ 360. Currently, under the Village Law of New York, a territory containing a population of at least 500 persons who are "regular inhabitants"~ may be incorporated as a village provided such territory does not include a part of a city or village and, with certain exceptions, does not contain more than five square miles. A village may be organized within a town. See S 2-200 of N.Y. Village Law. "Regular inhabitants" include all adults and minor persons residing in the territory except such persons who themselves, or who are infants residing with persons, maintain a residence outside such territory which is used as their address for purposes of voting. - 91 - The 1984 report of the FIEC to the Public Service Commission of New York, while indicating that the company serves more than 800 meters, states that the population of the Island is only 400. The question of whether the residents of Fishers Island could incorporate as a village, if they were otherwise disposed to do so, would seem to turn on the number of regular inhabitants in the community, whether more or less than 500. If more, they might consider incorporating as a village so as to qualify to organize a municipal utility under § 360 of the N.Y. Gen. Mun. Law. From a practical and political standpoint, we believe that this vehicle is probably too cumbersome and complicated to provide an efficient and effective means for establishing a municipal utility. 3. Extension of Existing Municipal Utility. The Village of Greenport, which is also within the Town of Southold, and the City of Groton, Connecticut, have established municipal utilities. The County of Suffolk, like Southold, is 49/ exploring the possibility of establishing such a utility. a. Groton, Connecticut Geography dictates that the electric distribution system on Fishers Island will be physically separate from any 49/ The County of Suffolk, in 1985, established a "Municipal Distribution Agency" for the purpose of qualifying for the purchase of PASNY hydropower. The legal efficacy of such agencies is discussed at length in Section IV of this Report. We anticipate that current litigation will result in a determination that the Suffolk County MDA is not a qualified preference customers under the Niagara Redevelopment Act. Other than the formation of Suffolk County's MDA we are not aware of any plan or proposal in Suffolk County to establish a public power system. - 92 - other regardless of the auspices under which the utility that operates it is organized. Geographically the Island is much closer to Groton, Connecticut than to Greenport or any part of Southold or any other part of New York. Its electric system is physically connected to Groton's, from which it purchases its power at wholesale. Consequently, we looked at Connecticut law to determine whether it enables Groton to extend service to Fishers Island. The answer appears to be no. Unlike New York law, which specifi- cally authorizes a municipal utility to provide service "within or without its territorial limits" (see N.Y. Gen. Mun. Law § 360(2)), Connecticut law appears to limit a municipal utility to providing service to itself and its inhabitants. See Conn. Gen. Stat. Ann~ §~ 7-213, 220, 224. Cf. City of Groton v. Connecticut Light & Power Co., 456 F. Supp. 360, 369-70 (D. Conn. 1978) (where the issue of authority of a Connecticut municipal utility to p~ovide service beyond municipal boundaries was raised but not decided). Assuming the Groton municipal utility quali- fies as a nonprofit corporation within the meaning of N.Y. RECL ~ 41, New York would permit it to acquire the distribution facili- ties and provide service on Fishers Island with all the rights and privileges of a New York cooperative corporation, by filing a designation of an agent with the New York Department of State. Regardless of the fact that, superficially, Connecticut law appears to limit municipal utilities to providing service within their municipal boundaries, the proximity of Groton and the fact that Fishers Island is electrically connected to Groton - 93 indicate that the possibility of entering into an arrangement with Groton should be further explored. See also N.Y. Gen. Mun. Law S 460 et seq., authorizing units of New York local government to enter into interlocal agreements with public agencies of other states to obtain services, including electrical, of kinds such units are authorized to provide to their citizens. If Groton were authorized under Connecticut law to enter into such an agreement, the Town of Southold would be empowered to contract on Fishers Island's behalf for power supply and related services. b. Greenport~ New York. As noted, Greenport is an incorporated village within the Town of Southold that is operating a municipal utility. As the authority of New York municipal utilities to serve areas outside their municipal boundaries is apparently not restricted to contiguous areas, it appears that Greenport could legally extend service to Fishers Island. The distribution system on Fishers Island would, of course, be completely separate from and in no way physically connected with or otherwise related to the rest of Greenport's system. We did not research the question of whether Greenport could issue bonds to purchase the Fishers Island system. The answer would seem to turn on whether such purchase could be justified as a village purpose. N.Y. Const., art. VIII, § 2. While the Village of Greenport could legally .operate and possibly acquire the assets of FIEC, there would appear to be no economic, political or practical reason to do so, given the geographical proximity of the two systems and the fact that they - 94 are electrically interconnected with different utilities and cannot be electrically interconnected to form a single electric distribution system. For these reasons, we see no reason to suggest the further exploration of any direct relationship between the existing Greenport system and a new publicly-owned utility system on Fishers Island. c. Extension of Southold Distribution System to Include Fishers Island Facilities. Fishers Island is located within the Town of Southold and the County of Suffolk, both of which are municipal corpora- tions eligible to establish municipal utilities pursuant to 50/ ~ 360. Since a municipal utility need not serve all the 51/ territory of the municipality, the Town of Southold could establish a municipal utility to serve only Fishers Island or Fishers Island and other territory within or without the Town's municipal boundaries. As discussed in Section II.A.5, supra, the Town has the power to issue tax-exempt obligations, obligations the interest on which is not subject to taxation as income to the holders by the federal or New York government. There would appear to be no question of the authority of the Town to issue For the reasons set forth in footnote 49, supra, we believe that there is no basis for examining the prospects of including Fishers Island in any plan to establish a Suffolk County public utility. We have, therefore, confined this analysis to a consideration of including Fishers Island in the establishment of a Town of Southold municipal system. See discussion in Section II.A.1, supra. See also O'Flynn v. Village of East Rochester, 292 N.Y. 156, 54 N.E.2d 343 (1944). - 95 - bonds to acquire the Fishers Island system, either separately or as part of a Town-wide utility system. In either case, the procedures and legal rights of the Town of Southold are those analyzed and identified in earlier sections of this Report. (See specifically, Sections II.A.1, II.A.2, II.A.3, and II.A.5.) Although we are not suggesting that the Town of Southold undertake a piecemeal municipalization project or to accomplish its municipalization objectives in phases, it may be relevant to point out that the Town of Southampton, New York, recently held a referendum which authorized the Town to establish a municipal electric utility and to acquire the electric distri- bution system of LILCO in a small and geographically discrete section of the Town known as the "Tiana Shores" area. The initial acquisition proposed is viewed as a pilot project which, if successful and economical, may lead to further expansion of the system to include all or other portions of the LILCO electric distribution system in Southampton. To date, no action has been taken by the Southampton Town Board to implement the municipal- ization plan authorized by the voters at the General Election in November 1985. As indicated earlier, we are of the opinion that the FIEC system should be acquired through a negotiated purchase by either a municipal electric system established by the Town of Southold or by a rural electric cooperative formed independently for this purpose. 96 - Preliminary information indicates that the present owners of FIEC may be amenable to a sale of the facilities to a publicly-owned utility. Assuming that this information is correct, there is a direct and compelling precedent for the acquisition of the system for a price which approximates the net book value of the system ($478,000). In this regard, the only recent voluntary sale and transfer of an electric distribution system in New York State Occurred in 1976 when the City of Sherrill, New York, acquired all of the utility facilities of Sherrill-Kenwood Power & Light Company, a wholly-owned subsidiary of Oneida Ltd. The SKP&L facilities had a net book value of approximately $1,000,000 which is the amount offered by the City of Sherrill and accepted by Oneida Ltd. The transfer of the SKP&L facilities to the City of Sherrill was subject to the approval of the New York Public Service Commission and the transaction was approved by the PSC after a finding that the purchase price was fair and reasonable and that the sale of the system to the City of Sherrill was in 52/ the public interest. We are of the view that the Sherrill-SKP&L transaction provides a direct corollary and precedent for the acquisition of 52/ The Sherrill-SKP&L negotiations commenced in May 1976 and were completed, subject to PSC approval, in August 1976. After receiving PSC approval and a contract commitment from PASNY for an allocation of hydroelectric power, the City of Sherrill commenced operation of the system on January 1, 1977. 97 - the FIEC facilities through negotiated purchase at or about the net book value of these facilities. 4. Bulk Power Supply and Transmission Considerations Respectinq Fishers Island. a. Bulk Power Supply. Assuming that a bona fide municipal utility or rural electric cooperative is established on Fishers Island p~rsuant to one of the alternatives discussed in this Section, such an entity would qualify as a preference customer of PASNY under the Niagara Project Redevelopment Act. As a preference purchaser, the system would be eligible for an allocation of hydroelectric power from PASNY assuming, of course, that such power is available. A public electric system on Fishers Island would also have access to all of the bulk power supply sources discussed in the R.W. Beck and Associates report to the Town of Southold and in Section IV of this Report. Although the source of power and energy to Fishers Island and the Town of Southold are approxi- mately the same, the economics (i.e., cost of power per kwh delivered to the distribution system at Southold and on Fishers Island) will be substantially affected by the proximity to the power source and the transmission charges which are applicable. In addition to the bulk power supply sources available to the Town of Southold as discussed in Section IV of this Report, a municipal or cooperatively-owned system on Fishers 53/ The matter of bulk power supply, including the legal entitlement to and availability of Niagara Project power, discussed at length in Section IV of this Report. This discussion is fully applicable in the case of the establishment of a public system on Fishers Island. is - 98 - Island would have the additional option of continuing to purchase all or part of its bulk power supply requirements at wholesale from Groton, Connecticut. Neither Duncan, Weinberg & Miller nor R.W. Beck and Associates have analyzed the economic advantages or disadvantages of forming a municipal utility and continuing to purchase all requirements from Groton. However, there would appear to be no economic advantage since purchased power costs would remain as they are today while the municipal or cooperative system would be required to amortize the costs of the acquisition. Thus, unless the acquisition of the facilities of FIEC can be acquired at or below net book value (depreciated original cost) electric power rates on Fishers Island would probably increase if the sole source of power purchased by the system is Groton, Connecticut. b. Transmission (Wheeling). If a public system (municipal or cooperative) is established on Fishers Island, that system would have the same rights to transmission or wheeling as the Town of Southold, as discussed in Section V of this Study. Assuming that the Fishers Island utility becomes the customer of PASNY, the Power Authority would be required to arrange for the transmission of power to the point of intercon- nection between PASNY's New York wheeling agents and transmission agents in the State of Connecticut. As mentioned earlier, PASNY has existing wheeling agreements with its New York wheeling agents to wheel power to the Connecticut border. Assuming that there are no deficiencies in transmission capacity under existing - 99 - arrangements, New York wheeling agents Corporation) are probably 54/ Island system. existing wheeling agreements between PASNY and its (particularly Niagara Mohawk Power sufficient to accommodate the Fishers In addition to the transmission and wheeling consider- ations discussed in Section V of this Report, a public ~system on Fishers Island would be required to address two additional mat- ters: transmission of PASNY power from the New York-Connecticut State line to Groton, Connecticut, and, from Groton to Fishers Island. In inverse order, there would appear to be no reason to change the existing physical arrangements for delivery .of power form Groton to Fishers Island. Under these circumstances, power delivered to Groton's substation from any third party source (including PASNY) would be transformed to lower voltage (4.8 Ky) and delivered to Fishers Island via the existing submarine cable. The existing contractual arrangements between Groton and FIEC would be terminated and a new contract negotiated 55/ between Groton and the Fishers Island system. Under the new 54/ Inasmuch as the peak load on Fishers Island is approximately 1 MW, it is inconceivable that the transmission of this modest amount of PASNY power would create any capacity problems on the existing backbone transmission system. It is anticipated that Groton, Connecticut, would cooperate in entering into a voluntary transformation and transmission agreement with the Fishers Island system. It should be noted, however, that such arrangements would result in the loss of sales and revenues now derived by Groton under its wholesale power contract with FIEC. This loss will be partially offset by the fees charged by Groton for trans- forming and delivering power from PASNY or some other source, for Fishers Island. - 100 - agreement, Groton would provide transformation and transmission services, presumably at cost-based rates, to the Fishers Island system. The contract could also contain provisions to provide for other utility services from Groton, including partial requirements service and emergency backup. The matter of securing delivery of PASNY power [rom the New York-Connecticut State line to Groton, Connecticut, for the account of a Fishers Island system, is somewhat more compli- cated. In this regard, a limited amount of PASNY power is presently delivered to Groton, Connecticut, under an inter- connection agreement between Connecticut Municipal Electric 56/ Energy Cooperative ("CMEEC") and PASNY. The transmission rate under that agreement is currently $1.465/kw/month for use of the Northeast Utilities Company's transmission system. In addition, a wheeling charge is paid to PASNY for delivery of power over the facilities of Niagara Mohawk Power Corporation to a point of interconnection with Northeast Utilities Company. Niagara Mohawk is currently seeking to raise its transmission rate from $1.58/kw/month to $2.25/kw/month. There is no question that the Niagara Mohawk-PASNY transmission agreement would accommodate transmission of PASNY power for Fishers Island to the point of interconnection between Niagara Mohawk and Northeast Utilities. CMEEC, of which Groton, Connecticut, is a member, is the designated bargaining agent for PASNY power sold to municipal and cooperative systems in the State of Connecticut. - 101 - As far as transmission of PASNY power for the account of a Fishers Island system by Northeast Utilities, we are of the opinion that these arrangements do not currently exist and would have to be negotiated, either between Northeast Utilizies Company and PASNY or between the Fishers Island system and Northeast Utilities. Since the Fishers Island system would not be eligible for membership in CMEEC and is not a third-party beneficiary of the contractual arrangements between CMEEC and Northeast Utilities Company, the existing transmission contract between CMEEC and Northeast Utilities Company would provide no assistance to the Fishers Island system. While the Fishers Island system, once established, could attempt to negotiate an independent transmission agreement with Northeast Utilities Company, we are of the view that these arrangements should be negotiated and arranged by PASNY. In this regard, the Niagara Project Redevelopment Act, 15 U.S.C. ~ 836(4), provides, in relevant part, that: (4) The licensee shall, if available on reasonable terms and conditions, acquire by purchase or other agreement, the ownership or use of, or if unable to do so, construct such transmission lines as may be necessary to make the power and energy generated at the project available in wholesale quantities for sale on fair and reasonable terms and condi- tions to privately owned companies, to the preference customers enumerated in paragraph (a) of this subsection, and to the neigh- boring States in accordance with paragraph (2) of this subsection. Thus, once PASNY agrees to sell power to a preference customer, it assumes a corresponding obligation to arrange for the trans- mission and delivery of such power, whether in-state or out-of- - 102 state. We are of the opinion that, upon allocating power to the Fishers Island system, PASNY would be required to arrange for transmission and delivery of such power over the transmission facilities of Northeast Utilities Company to Groton, Connecticut. To the extent that the Fishers Island system elects to 57/ purchase power and energy from some source other than PASNY, the Fishers Island system would be required to arrange for trans- mission and delivery of such power independently as explained in Section V of this Report. IV. BULK POWER SUPPLY OPPORTUNITIES. In the Engineering Overview Study, R.W. Beck and Associates estimated that the peak power demand of electric customers within the Town of Southold, exclusive of customers presently served by the Village of Greenport, will be approxi- mately 25,140 kilowatts in 1986. See Beck study, pp. 1-5. The Engineering Overview Study then sets forth an analysis of the estimated funds which will be available for debt service based upon two different assumptions regarding the source of bulk power supply available to the Town. The first assumption made is that approximately four-fifths of Southold's peak load would be met with the purchase of some 20,615 kw of hydroelectric power from the Power Authority of the State of New York's Niagara and/or St. Lawrence power projects. The second assumption made by R.W. Beck and Associates is that the Town of Southold may obtain an alloca- tion of 10,000 kw of PASNY hydroelectric power. The Beck study 57/ See discussion in Part IV of this Report. - 103 - further assumes that, in either case, the balance of Southold's power requirements would be furnished by PASNY from the Authority's FitzPatrick nuclear plant. As part of this legal feasibility study, the Town Board has requested that we examine the legal efficacy of the Beck Study's assumptions and to advise the Town Board respecting the Town's legal rights to participate in the allocation of hydro- electric and other forms of electric power and energy from PASNY and other power suppliers. The result of our analysis is set forth below. Power Authority of the State of New York. 1. Niagara Project Power. One potential source of bulk power supply for Southold is Niagara Project power. The Niagara Project has 1,880 MW of firm capacity, a nameplate capacity of 2,190 MW, a dependable capacity of 2,400 MW and a normal net peak capability of 2,615 MW. Availability of this power to Southold may depend upon the outcome of litigation discussed below. As a condition of its license to operate the Niagara Hydroelectric Project, PASNY is required, under the Niagara Project Redevelopment Act, to "give preference and priority to public bodies and cooperatives" when disposing of fifty per cent 58/ (50%) of the project output. See 16 U.S.C. ~ 836(b) (1).. In recognition of the fact that existing preference customers could 58/ PASNY also has a responsibility under state law to allocate power generated at the St. Lawrence Project to public bodies and cooperatives. See N.Y. Pub. Auth. Law ~ 1005(5). - 104 - not utilize 50% of the project output at the time the Niagara power was originally being marketed in 1960, PASNY is authorized to sell the power to non-preference customers (primarily investor-owned utilities), provided that it makes: · flexible arrangements and contracts providing for the withdrawal upon reasonable notice and fair terms of enough power to meet: the reasonably foreseeable needs of the preference customers. 16 U.S.C. S 836(bi~ (1). The significance of these provisions and the scope of the rights they afford publicly-owned electric systems are currently the subject of cases now pending before the federal courts and may be the subject of further proceedings before the FERC as explained in detail below. Despite its statutory mandate to reserve, or make flexible arrangements for the use of 50% of Niagara power for preference customers, PASNY contractually committed over 50% of Niagara power through 1989 to non-preference customers. By way of explanation of the quantity of hydroelectric power involved in the dispute over the allocation of Niagara Project power, the rated firm capacity of the Project is 1,880 megawatts (1,880,000 kw) of which 50% (940 MW) is subject to the preference provisions of the Niagara Project Redevelopment Act. The Act also required that up to 10 percent of the output of the Niagara Project be marketed to qualified preference customers in neighboring states. It has been PASNY's practice over the years to sell approximately 188 MW of Niagara Project power to prefer- ence customers in neighboring states and, although the recipients of this out-of-state preference power have changed from time to 105 - time, it is not anticipated that the amount of preference power sold to preference customers outside of New York State will change appreciably in the future. Under the foregoing circumstances, qualified preference customers in the State of New York (i.e., municipally and cooperatively-owned electric distribution systems) are, in our opinion, entitled to purchase at least 752 MW of firm capacity and energy from the Niagara Project. In addition, the FERC has previously held that PASNY is required to market 50% of all other classes of power (e.g., peaking power) from the Niagara Project to preference customers. At the present time, New York preference customers are receiving only 547.2 MW of firm power and energy from the Niagara Project. In November 1979, PASNY ceased to make further allo- cations of Niagara Project power and energy available to pref- erence customers because of pre-existing contractual commitments to its investor-owned utility customers and capped New York preference allocations at 547.2 MW. Since that time, the peak load of PASNY's New York preference customers have grown to approximately 630 MW, leaving a significant shortfall in the amount of hydroelectric power necessary to service the load. To meet this shortfall, PASNY, in November 1979, began selling nuclear power from its FitzPatrick Nuclear plant, to meet the additional requirements of New York preference customers. Each preference customer which has exceeded its "contract demand" 59/ 59/ "Contract demand" is that amount of Niagara Project power which PASNY is contractually bound to sell to New York (continued) 106 - since November 1979 has been assessed a "nuclear surcharge" for each kilowatt-hour purchased over "contract demand." This surcharge is substantially higher per kwh than power purchased from the Niagara Project. Based upon notices issued by PASNY in 1978 that addi- tional Niagara Project power would not be made available to pref- erence customers, the Municipal Electric Utilities Association of New York State ("MEUA") filed suit before the FERC claiming that PASNY's allocation of nuclear power to preference customers vio- lated the terms of the Niagara Redevelopment Act as well as PASNY's license to operate the project. See Municipal Electric Utilities Association v. Power Authority, No. EL78-24 (FERC filed 60/ May 12, 1978). The Commission ultimately held that PASNY had violated the terms of its license by failing to reserve or make flexible arrangements for the withdrawal of adequate amounts of hydropower to serve preference needs, and therefore ordered PASNY to conduct a new allocation process in which it must consider the reasonably foreseeable needs of its preference customers 61/ beginning on July 1, 1985. See Municipal Electric Utilities 6o/ preference customers under individual power contracts executed by PASNY's preference customers between 1961 1979. These contracts expired on June 30, 1985. and During the course of the litigation, PASNY's preference customers paid a "nuclear surcharge" to cover the higher cost of their power supply. Pursuant to agreement, PASNY was obligated to refund the amount of the excess charges if MEUA prevailed in the case. 61/ In its initial decision, the Commission determined that PASNY should be required to provide a full 50% of Niagara Project output to preference customers and to refund the difference between the cost of hydropower and the cost of nuclear power which they had been sold. While the case was (continued) - 107 - Association v. Power Authority of the State of New York, 21 FERC (CCH) ~I 61,021 (1982), aff'd in part and rev'd in part, 23 FERC (CCH) ~I 61,031 (1983), modified, 23 FERC ~I 61,064 (19821), reh'g denied, 23 FERC ~[ 61,302 (1983). The final decision of the FERC was appealed to the United States Court of Appeals for the Second Circuit which upheld the Commission's interpretation and application of the Niagara Project Redevelopment Act on August 14, 1984. Although the court refused (as had the FERC) to award relief for PASNY's refusal to increase hydroelectric power allocations to preference customers during the period from November 1979 through July 30, 1985, the date upon which all existing contracts for Niagara Project power expired, the Second Circuit did confirm that PASNY's preference customers were entitled to up to an additional 150.33 MW of Niagara Project power beginning July 1, 1985. In a clarifying order, the Second Circuit ruled that the additional preference allocation would be made available in increments, commencing with an additional 39 MW in 1985 and increasing to a total of 697.53 MW in 1989. In 1990, PASNY contracts with investor-owned utilities for Niagara Project power expire. At pending on rehearing, however, certain public officials (including Members of Congress and the New York State Legislature) made off-the-record requests that the Commis- sion reconsider its decision. The Commission subsequently withdrew much of the relief that would have benefitted PASNY's municipal customers on the ground that the amount of hydropower actually allocated to preference customers approximated what their reasonably foreseeable needs would have been at the time the allocations were made. See Municipal Electric Utilities Ass'n v. Power Authority of the State of New York, 23 FERC ~I 61,031, modified, 23 FERC ~l 61,064 (1983). - 108 - that time, preference customers in New York State will be entitled to a full 752 MW of firm power and energy from the Niagara Project. During the period following the issuance of the Second Circuit decision on August 15, 1984, representatives of the MEUA attempted to negotiate new hydroelectric power contracts with PASNY to become effective July 1, 1985, when existing contracts expired. However~ PASNY refused to enter into a contract for any amount of power in excess of 547.2 MW and attempted to limit the ability of MEUA members to obtain compensation for any deficient allocation. Therefore, MEUA members are currently receiving Niagara Project power without any specific contractual commitment for that power. Rather than allocate the 39 MW ordered by the Second Circuit to MEUA members, PASNY has allocated the full 39 MW to various municipal distribution agencies ("MDA's") throughout New York State. These MDA's were created at the urging of PASNY for the express purpose of purchasing Niagara Project preference power. PASNY has allocated Niagara Project preference power to 52 MDA's throughout New York State but is currently selling a total of 39 MW of Niagara Project preference power to six MDA's in downstate New York: New York City, Westchester County, Orange County, Rockland County, Suffolk County, and Nassau County. The MDA's are conduit agencies which purchase pref- erence power and sell it to consumers of private power companies through agreements with those private power companies. Existing agreements provide that the private utility will remain the 109 - exclusive operator of its distribution facilities, that the private utility will make all arrangements for transmission of Niagara Project power, that the private power company will retain sol~ franchise responsibility for provision of electric power to all customers, that the private utility is responsible for all billing and collection functions, and that the private utility will retain all liability in tort and contract and indemnify the MDA from any contract or tort action. Resolutions establishing these MDA's provide that the MDA may neither condemn facilities of the existing private power company nor build facilities which duplicate those of the existing private power company. A provision in the agreements requires the MDA's to pay the private power companies a fee for the distribution of Niagara Project power. This fee is equal to the existing cost per kilowatt-hour less fuel and purchased power costs. As a result, the consumers must pay the private power companies for their generation and transmission facilities, even though the private power companies claim to provide only distribution facilities. It is our legal opinion that the MDA's fail to meet the criteria set forth by the FERC and, therefore, do not qualify as "public bodies" or preference customers pursuant to the Niagara Redevelopment Act. Certain pending litigation addresses this question. The Federal Energy Regulatory Commission has decided that the Vermont Department of Public Service, which purchased preference power from PASNY and resold it equally to municipally- owned electric utilities, rural electric cooperatives, and - 110 - investor-owned utilities, does not qualify as a "public body" or preference customer pursuant to the Niagara Redevelopment Act. Additionally, it decided that the Metropolitan Transportation Authority, which ils an ultimate consumer of power, may not qualify as a "public body" or preference customer pursuant to the Niagara Redevelopment Act. Massachusetts Municipal Wholesale Electric Company v. Power Opinion No. 229, 30 FERC 229"); Opinion No. 229-A, No. 229-A"). There, the FERC Authority of the State of New York, (CCH) ~! 61,323 (1985) ("Opinion No. 32 FERC (CCH) ~I 61,194 (1985) ("Opinion established certain indicia of a "public body" and preference customer pursuant to the Niagara Redevelopment Act~ First, an entity must be "capable of selling and distributing power directly to consumers at retail." 32 FERC at 61,445. Second, an entity must be directly responsible for the needs of the consumers served or, in other words, have utility responsibility to the ultimate consumer. See 32 FERC at 61,444. Third, an entity must be capable of providing yardstick competition with private power companies. See also Power Authority of the State of New York v. Federal Energy Regulatory Commission, 743 F.2d 93, 105 (2d Cir. 1984). Fourth, neither investor-owned utilities nor their consumers may benefit directly from preference power. Fifth, the definition of "public bodies" may not be so broad as to dilute the benefit of the preference. This case is now pending on appeal to the United States Court of Appeals for the Second Circuit. See Metropolitan Transportation Authority v. FERC, No. 85-4115 (2d Cir. Dec. 4, 1985). - 111 - order pursuant to the Niagara Redevelopment Act. PASNY v. Civ. 6584 (JES) (S.D.N.Y. filed September 6, 1983). PASNY allocated power to the MDA's, MEUA filed suit In 1983, PASNY filed a complaint seeking a declaratory regarding whether the MDA's qualify as preference customers MEUA, 83 As Soon as in the same court challenging the allocations. MEUA v. PASNY, 85 Civ. 1124 (JES) (S.D.N.Y. filed February 11, 1985). These cases have been briefed to the Judge on motions for summary judgment, and oral argument has been heard. At oral argument on December 13, 1985, the Presiding Judge indicated that he would deny both motions for summary judgment and suggested that the parties have the issued decided before the FERC. As of the date of this Report, the Court had entered no formal order. There are three other arenas in which the question of whether the MDA's qualify as public bodies may be litigated. First, MEUA has challenged the sufficiency of the MDA's pursuant to state law, claiming that some MDA's failed to follow proce- dural requirements and that all MDA's failed to comply with the substantive requirements of N.Y. Gen. Mun. Law ~ 360. The Supreme Court of New York County dismissed the complaint on the grounds that MEUA must sue each of the 52 MDA's individually within its own county, rather than suing PASNY and the MDA's in a single forum. MEUA has filed an appeal of this ruling. Second, MEUA has challenged the validity of the agreements between the MDA's and the local private power companies before both the FERC and the N.Y. Public Serw[ce Commission. The FERC has dismissed that portion of the MEUA - 112 - challenge which relates to the "public body" issue on the basis that the complaint must be made against PASNY, the licensee, rather than the private utility filing the agreement. The N.Y. Public Service Commission has continuously extended its interim approval of the agreement and has taken no definitive action on the leases. As noted above, PASNY is currently marketing 547.2 MW of Niagara Project preference power to municipally-owned electric utilities which are members of MEUA and to New York rural electric cooperatives. PASNY has indicated that it will not reduce the amount of power being sold to these systems pending the outcome of current litigation. If Southold is to obtain firm Niagara Project pref- erence power, it is our opinion that Southold will obtain such power only from that pool of power in excess of the 547.2 MW currently marketed to existing municipal and cooperative systems. One source of that power is the power currently and potentially allocated to the MDA's. This amount is 39 MW at the present time and will increase to more than 150 MW by 1989 and approximately 205 MW by 1990. If the courts uphold our legal conclusion that the MDA's do not qualify as public bodies or preference customers pursuant to the Niagara Redevelopment Act, PASNY must reallocate the power to true preference customers. At that point, PASNY may (1) allocate equally among all qualified preference customers or (2) allocate a greater amount to pre-existing preference customers than to new preference customers. Southold should not - 113 - expect to be treated in a manner any more favorable than such pre-existing preference customers. MEUA members and the four New York rural electric cooperatives combined had a 1983 peak load of 630 MW. That peak load decreased in 1984. If those pre-existing preference custo- mers do not requ%re 697.53 MW of power by 1989 or 752 MW by 1990, the remaining amount will be available for other preference cus- tomers, including Southold. It is possible that Southold's entire needs could be met by hydroelectric power which is beyond the needs of current preference customers. 2. St. Lawrence Project Power. If Southold's needs cannot be met directly with Niagara Project power, some of those needs might be met by St. Lawrence Project hydropower, which costs exactly the same amount as Niagara Project power. The St. Lawrence Project has a nameplate capacity of 912 MW. PASNY markets 821 MW from the project: 717 MW as firm capacity and 104 MW as interruptible capacity. While the Niagara Redevelopment Act has a specific provision affording preference and priority for 50 percent of the Niagara Project power for public bodies and rural electric cooperatives, there is no such Federal legislation which affords a preference as to a "reasonable amount" of St. Lawrence power to municipally-owned utilities. See N.Y. Pub. Auth. Law § 1005(5). The question of what constitutes a "reasonable amount" of St. Lawrence Project power has never been judicially determined. After the issue of preference customer entitlement to Niagara Project power is finally resolved, it may be necessary for 114 - preference customers to seek judicial determination of the amount of St. Lawrence Project power which must be sold to municipally- owned utilities. One final matter bearing upon the availability of PASNY hydroelectric power warrants mention and consideration by the Southold Town Board. In his state of the State message on January 9, 1986, Governor Cuomo included the following declaration: While I belive that we should increase our ability to utilize low-cost energy for economic development, I shall continue to oppose, as I have always opposed, proposals to reallocate substantial quantities of hydropower downstate. We will not solve the problem of high residential electric rates downstate by increasing such rates upstate. Extensive reallocation of hydropower away from upstate New York will produce only marginal benefits for ratepayers downstate, while imposing both a severe burden on ratepayers upstate and a substantial drain on the region's economic viability. Since the Governor must approve all contracts for the sale of hydroelectric power, his stated policy to oppose further allocations of hydropower in the downstate area may be a factor which the Town of Southold must deal with in seeking an alloca- tion. There is, of course, no legal reason for refusing an allocation to a legitimate municipal electic system on Long Island and treating that system on an equal basis with Greenport, Freeport and Rockville Centre. 3. FitzPatrick Project Power. The FitzPatrick nuclear power plant provides the second least expensive source of power in New York State. It has a capacity of 810 MW. PASNY has marketed FitzPatrick power to 115 - existing New York municipally-owned electric utilities and rural electric cooperatives to meet their needs beyond the available hydroelectric power provided to these entities. PASNY was authorized to construct the FitzPatrick Project in part to meet the future electrical needs of New York municipally-owned electric utilities and rural electric cooperatives. See N.Y. Pub. Auth. Law S 1001 (McKinney 1982). Therefore, when PASNY alleged that there was no additional hydropower to meet the needs of New York preference customers, it commenced supplying FitzPatrick Project power to those customers. B. Other Potential Sources. The feasibility of a municipal project of this nature need not be dependent upon the availability of a hydropower allo- cation from PASNY. A municipal system may operate successfully under circumstances in which it purchases all its electric requirements from other publicly-owned or privately-owned utili- ties, a power pool, or other sources. Potential sources of bulk power supply in this case would include any of the investor-owned utilities serving New York or its neighboring states, the New York Power Pool, the New England Power Pool, the P-J-M Power Pool, the Massachusetts Municipal Wholesale Electric Company ("MMWEC"), and certain government-owned utilities in Canada. Alternatively, a municipal utility may generate its own power or invest with other utilities in jointly financed and operated generation facilities. Joint action projects of this nature have become a very promising power supply alternative for publicly- owned electric systems, allowing individual systems whose needs - 116 do not warrant construction of a large facility to join with other such systems in order that they may all enjoy economies of scale. Other power supply options include the purchase of power from co-generation facilities or small hydroelectric facilities. Evaluation of the economic feasibility of any of these alternatives, or a combination thereof, must await certain engineering analyses and political decisions. Suffice it to say at this stage, however, that a municipal electric system established pursuant to S 360 of the General Municipal Law may obtain its power requirements from any of the aforementioned sources. To the extent that the municipal utility' may be left to purchase power from investor-owned utilities, it may ultimately rely on the legal principle that a public utility has an obliga- tion to deal in a fair, lawful and non-discriminatory manner. See United Fuel Gas Co. v. Railroad Commission, 278 U.S. 300, 309 (1929). That responsibility may be judicially enforced pursuant to the federal antitrust laws, see, e.g., Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), and the Federal Power Act, see, e.g., Federal Power Commission v. Conway Corp., 426 U.S. 271 (1976). V. RIGHT TO OBTAIN WHEELING. If the Town or Village purchases bulk power supplies from anyone other than PASNY, it must make arrangements to have that power delivered via high voltage transmission lines. The transmission of power and energy at high voltage by one utility for the use of another is known as "wheeling." - 117 - In the case where the municipal system purchases its bulk power supply from PASNY, PASNY is statutorily obligated to ensure that the power is capable of being wheeled to its custo- mers. See 16 U.S.C. S 836(b) (4). In that regard, PASNY's contracts with its principal wheeling agents in New York (Niagara Mohawk Power Corporation, Rochester Gas & Electric Corporation, New York State Electric & Gas Corporation, and LILCO) provide for wheeling of PASNY power to newly formed municipal systems. Indeed, the Power Authority Act says that PASNY must contract for or build transmission. See N.Y. Pub. Auth. Law ~ 10051.5, 1005.7; see also New York State Electric & Gas v. FERC, 638 F.2d 388, 390 (2d Cir. 1980), cert. denied, 454 U.S. 821 (1981). This is not to say that a new municipal system would not have some d.ifficulty securing wheeling arrangements. The investor-owned utility segment of the electric industry has fre- quently demonstrated recalcitrance in providing Wheeling service to publicly-owned utilities, often with anticompetitive over- 62/ tones. No court or agency has yet forced PASNY to meet its transmission responsibilities. 62/ The FERC has offered little assistance to municipal systems seeking to obtain wheeling services from surrounding investor-owned utilities. In Southeastern Power Administra- tion v. Kentucky Utilities Co., 25 FERC (CCH) ~l 61,204 (1983), the Commission refused to order Kentucky Utilities Co. to wheel power sold by Southeastern Power Administration to eight municipal systems in Kentucky that were existing wholesale customers of Kentucky Utilities. The basis of the Commission's denial of relief was that the municipalities could not prove that a wheeling order would reasonably preserve existing competitive relationships,, as required by ~ 211 of the Federal Power Act. - 118 Federal antitrust laws may provide a means of obtaining wheeling services if a utility does not provide such services voluntarily. If there are no alternative transmission facilities, the utility in question is said to have a bottleneck monopoly in transmission services. An unreasonable refusal to grant access to the bottleneck has been held to violate the antitrust laws in a number of cases. See, e.g., Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) (electric transmission facilities); Silver v. New York Stock Exchanqe, 373 U.S. 341 (1963) (private wire connections for securities broker-dealers); United States v. Terminal Railroad Association, 224 U.S. 383 (1912) (railroad bridge); City of Mishawaka v. American Electric Power Co., 616 F.2d 976 (7th Cir. 1980), cert. denied, 449 U.S. 1096 (1981) (electric transmission facilities); Hecht v. Pro- Football~ Inc., 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 U.S. 956 (1978) (football stadium); Woods Exploration & Producinq Co. v. Aluminum Co. of America, 438 F.2d 1286 (5th Cir. 1971), cert. denied, 404 U.S. 1047 (1972) (gas field); Gamco~ Inc. v. Providence Fruit & Produce Bldg.r Inc., 194 F.2d 484 (lst Cir.), cert. denied, 344 U.S. 817 (1952) (produce market); American Federation of Tobacco Growersr Inc. v. Neal, 183 F.2d 869 (4th Cir. 1950) (tobacco market); united states v. Tarpon Springs Sponge Exchange, 142 F.2d 125 (5th Cir. 1944) (receiving port for natural sponge). It is the opinion of legal counsel that a utility company which is capable of providing wheeling services cannot unreasonably refuse to provide 'them. See Otter Tail Power Co. v. 119 - United States, 410 U.S. 366 (1973). Thus, a utility may refuse to provide wheeling service only if it is unable to safely or adequately provide such service due to lack of capacity or some related reason. ]in each of the four alternatives outlined above, it is contemplated that either Southotd, or the Village of Greenport on behalf of Southold, might request a new allocation of PASNY power to serve customers in the Town. This would have to be wheeled over LILCO's lines, and would represent an increased burden to LILCO. The Town and Village should recognize that this situation may result in litigation, and thus, an impediment to a smooth changeover in bulk power supply for the 63/ new municipal utility. In Alternatives one and Two, 64/ which envision a municipal utility owned and run by the Town, or owned by the Town but run by Greenport, Southold would need to ensure a contract for wheeling of PASNY power by LILCO to Southold's new system. Southold would also need to contract with PASNY for the wheeling over Southold's system of Greenport's allocation of PASNY power. In Massena's municipalization effort, for example, Niagara Mohawk was able temporarily to thwart Massena's attempts to obtain wheeling, in part because the company was able to argue that the service requested by Massena was unlike any wheeling service offered to other municipal customers. See Town of Massena v. Niagara Mohawk Power Corp., 1980-2 Trade Cas. (CCH) ¶ 63,526 (N.D.N.Y. 1980). The following discussion assumes the request by the Town or Village of a new or increased PASNY allocation. It also assumes that the Town and/or Village will agree to wheel power for LILCO to serve Shelter Island and Plum Island, and that contracts to that end will be negotiated. - 120 - In Alternative 3, which envisions a joint utility including both Southold and Greenport, the two municipalities would be unified for the purposes of wheeling. Because the amount of PASNY power to be wheeled would be increased by the amount of Southold's new allocation, a new contract, or modifications to the old wheeling contract between PASNY and LILCO, would have to be made. In Alternative Four, where the Village would enlarge its service territory to the boundaries of the Town, the contract between PASNY and LILCO for the wheeling of power to Greenport would have to be modified to define specifically where the wheeling terminates, and to specify the amount of power to be wheeled. VI. JURISDICTION OF REGULATORY AGENCIES OVER THE MUNICIPALLY- OWNED UTILITY. A. Federal Jurisdiction. The Federal Power Act exempts municipal corporations from the normal regulatory scheme imposed by the Federal Energy Regulatory Commission under Part II of the Act. See 16 U.S.C. § 824(f). The applicability of the federal regulatory regime to a municipal utility therefore depends upon whether it has entered into any transactions with other utilities that are subject to the jurisdiction of the FERC. Because PASNY is itself a government agency, and therefore exempt from regulation under Part II of the Act, of bulk power by PASNY to its municipal customers regulation by the FERC. The rates at which power sales are exempt from is sold and the - 121 - 65/ terms and conditions of service are fixed by contract. As noted below, PASNY is also obligated to provide for wheeling service to its municipal customers. See 16 U.S.C. ~ 836(b) (4). A circumstance which would give rise to FERC jurisdic- tion over the operation of a municipal system would be the pur- chase by the municipality of wholesale power from a source other than PASNY. Wholesale sales of electricity have been determined by the Supreme Court to constitute interstate commerce and there- fore fall within FERC's jurisdiction over electric rates pursuant to Part II of the Federal Power Act. The seller, if other than another entity exempt under the Act, would be regulated by the FERC, and thus any bulk power transfers to municipalities by such a wholesale seller would fall under the jurisdiction of FERC. MMW-EC, being another public agency, is also exempt from FERC regulation. Should the Town or Village ultimately contract with MMWEC for the supply of bulk power, that transaction would 66/ This is not to say that PASNY's transactions with its municipal customers are wholly beyond the purview of the FERC. As the licensee of the Niagara and St. Lawrence Projects, PASNY is required to act in accordance with federal and state law pursuant to which the licenses were issued, as well as the terms of its licenses, all of which may be enforced either by the FERC or other interested persons. See 16 U.S.C. SS 825e, 825p; Auer v. Dyson, 110 Misc. 2d 943, 444 N.Y.S.2d 513 (Oswego Co. 1981), afl'd, 112 A.D.2d 803, 491 N.Y.S.2d 1022 (1985). See Federal Power Commission v. Southern California Edison Co., 376 U.S. 205 (1964). The Supreme Court has recently held that wholesale transactions which are not subject to FERC regulation, such as sales by municipally-owned utilities and rural electric cooperatives, may be subject to state regulation, at least in those cases where the state has chosen to exercise jurisdiction. See Arkansas Electric Coop. Corp. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375 (1983). - 122 - be exempt from FERC regulation. Similarly, any bulk power purchases from Canadian utilities would be exempt from FERC regulation. Neither MMWEC nor the Canadian utilities, however, would be capable of providing wheeling services. Thus, the Town or village would have to make separate arrangements for wheeling that power to its system. To the extent that wheeling is provided by a privately-owned utility, the wheeling agreement would be subject to oversight by the FERC. If the bulk power supply is obtained from any power pool or individual investor-owned utility, the power supply contract as well as any wheeling agreements would be subject to FERC jurisdiction. Part II of the Federal Power Act prescribes that all rates and charges imposed by an electric utility relating to the sale or transmission of electric energy be just and reasonable. See 16 U.S.C. ~ 824d(a). Any utility subject to the jurisdiction of the FERC must file its rates and charges with the Commission, at which time the Commission reviews them to determine whether they are unreasonable, discriminatory or preferential. If such a finding is made, the FERC sets reasonable rates and charges. See 16 U.S.C. ~ 824e(a). Any request for a change in rates or charges must be made on no less than sixty (60) days notice. See 16 U.S.C. § 824d{d). The utility proposing the change has the burden of justifying its request. See 16 U.S.C. § 824d(e). The Commission may suspend application of the new rate for up to five (5) months, and may, in the meantime, set a hearing on the reason- ableness of the proposed rate, charge or classification. The - 123 Town or Village would be entitled to file comments and to par- ticipate in any hearing with respect to a rate or charge to which it is subject. Although the proposed rate may be allowed to go into effect prior to the Commission's approval, the amount of the increase is subject to refund if the Commission finds all or any part of it to be unreasonable. The Commission may also, on its own motion or upon the request of any state commission, investigate and determine the cost of production or transmission of energy by means of facili- ties subject to its jurisdiction, even where it has no authority to establish rates for the sale of such energy. See 16 U.S.C. ~ 824e(b). B. State Jurisdiction. 1. Retail Rates. No state agency, including the Public Service Commission of the State of New York and the Power Authority of the State of New York, has a regulatory veto power over the initial formationr construction or acquisition of a municipally- 67/ owned electric system. Once having acquired an electric distribution system, a municipality will remain exempt from regulation by the New York Public Service Commission only to the extent that it purchases 67/ See Village of East Rochester v. Rochester Gas & Electric Corp., 262 A.D. 556, 31 N.Y.S.2d 754, aff'd 289 N.Y. 391, N.E.2d 334 (1943). 46 - 124 - 68/ power from PASNY. Under the Power Authority Act (N.Y. Pub. Auth. Law, Sections 1000 et seq.), PASNY is required by law to assume regulatory responsibilities with respect to its publicly- owned customers. At least as to the resale rates for sales to domestic and rural consumers, PASNY is required to set conditions to assure that the power is sold at the lowest possible price, which PASNY seems to interpret as allowing approximately six percent (6%) above cost, in order to cover maintenance, overhead, and other expenses. Ordinarily, retail rate adjustments are ap- proved routinely by PASNY except where it is shown that contri- butions to the general fund or the accumulation of revenues is excessive, or that service provided by the municipal corporation is inadequate. Such problems are ordinarily resolved in the context of PASNY's review of annual reports filed by its municipal customers and in the context of rate adjustment 69/ proceedings. Retail rates for power obtained from any source other than PASNY, however, would be subject to regulation by the New A municipal electric utility purchasing from PASNY operates its service under N.Y. Public Auth. Law ~ 1000 et seq., and not under N.Y. Pub. Serv. Law. ~ 64. See Op. Att'y Gen. (Inf.) 308 (1975). The retail rates charged by a municipal corporation for electric power marketed to retail customers are subject to the jurisdiction and approval of PASNY. However, the muni- cipal corporation marketing such power is permitted, under State law, to charge rates which yield a fair rate of return on the capital investment of such municipal corporation. A reasonable margin or "profit" may be earned and retained as accumulated reserves or contributed as payments in lieu of taxes to the general fund of the municipal corporation. 125 - York Public Service Commission. The provisions of Article IV of the Public Service Law, dealing with the regulation of elec- tricity prices, are specifically made applicable to municipal corporations furnishing public utility service. See N.Y. Gen. Mun. Law ~ 364. The New York Public Service Law requires municipal electric companies to provide safe and adequate service. See N.Y. PSL S 65(1). All charges must be just and reasonable. See id. at ~ 65(2). The granting of unreasonable preferences is specifically prohibited. See id. at ~ 65(3). The PSC maintains jurisdiction over the manufacture, conveying, transportation, sale or distribution of electricity. See id. at ~ 5(b); N.Y. Gen. Mun. Law § 364(1). It may examine and investigate methods employed in the manufacturing, distribu- tion or supply of electricity, and order reasonable improvements to promote the public interest. See N.Y. PSL S 66. It may pro- vide uniform methods of accounting and may, on its own motion or upon a complaint, hold a hearing to determine whether rates, charges, classifications or acts of the municipal utility are unjust, unreasonable, unjustly discriminatory, unduly preferential or in violation of the law. See id. at ~ 66(5). Utilities subject The two circumstances in which the Public Service Law is inapplicable to municipal utilities are: (1) a municipal corporation need not obtain a certificate of authority from the PSC, and (2) a municipal utility need not decrease rates or charges on order of the PSC unless the order is issued after notice and a hearing instituted upon the verified complaint of at least twenty-five active utility consumers, residing in the territory in which the subject rates are applicable. See N. Y. Gen. Mun. Law ~ 364(2). - 126 - to its jurisdiction are required to file annual reports showing the amount of indebtedness of their systems, receipts and expenditures, the location of plant and systems with a full description of the property and other information. See id. at ~ 66(7). Should the Town or Village purchase power from both PASNY and any other source, the PSC would set overall rates and charges to reflect PASNY ratemaking methodology as to the PASNY power, see Pub. Auth. Law ~ 1005(5), and traditional cost of service ratemaking methodology as to the other power. This procedure is currently applied in a few municipalities in New York which generate their own electricity in addition to pur- chasing PASNY power. The question of where PASNY jurisdiction and Public Service Commission jurisdiction overlap is a very serious one, with important consequences for any joint action between the Town and Village. It is clear that where a municipal utility pur- chases power from PASNY, then it is governed by the requirements of the Public Authorities Law, and where the sales involve non- PASNY power, Public Service Commission jurisdiction is appli- cable. PASNY may interpret its jurisdiction in an expansive manner if it appears that PASNY-generated power rates are higher in order to cross-subsidize other projects involving non-PASNY power. It is certainly possible that the Public Service Commission could interpret its mandate in a broad fashion and investigate all rates and charges, asserting that they impact upon Public Service Commission controlled rates and charges. 127 - 2. Environmental Impact Statement. New York State has an environmental statute paralleling the requirements of the Federal National Environmental Policy Act (see Environmental Conservation Law ~ 8-0101 et seq., commonly referred to as SEQRA). As early as possible in the formulation of plans regarding an acquisition, an agency must make an initial determination as to whether the project will have a significant effect on the environment. 6 N.Y.C.R.R. ~ 617.7(c) (1978). Unless a lead agency, such as the Department of Environmental Conservation, is designated, any involved agency is free to make an independent determination of significance. In order to better coordinate the review process, a municipality may choose to proceed in the following manner. The establishment of a municipal utility is considered by the Department of Environmental Conservation to be an 71/ "unlisted action",, thus minimizing the degree of formality required during the early stages of the environmental review process. As an involved agency itself, a municipality may make a determination of significance (either positive or negative) and immediately notify all involved agencies, supplying them with copies of any Environmental Assessment Forms (EAF's) and other data supporting the determination. If, within 15 calendar days of receipt of the notice, no involved agency submits written Actions are categorized as Type I, Type II or unlisted. Type I actions are more likely to require an EIS and Type II actions never require an EIS. Unlisted actions must be reviewed independently. 128 - objection to a municipality acting as lead agency, it shall automatically become such. 6 N.Y.C.R.R. ~ 617.7(d), (e), (f). If objection is made, designation of a lead agency shall be made by agreement between involved agencies, or if agreement cannot be reached, by the Commissioner of DEC. 6 N.Y.C.R.R. S 617.6(d), (e). Although completion of an EAF is not required for an unlisted action, an agency may desire completion of either a long or short EAF to help in its determination of significance. If a determination is made that the project will not have a signifi- cant effect on the environment, the lead agency shall maintain for public inspection a file of its determination and supporting reasons. 6 N.Y.C.R.R. ~ 617.7(e) (2). If, on the other hand, a determination is made that the project may have a significant environmental effect, an EIS must be prepared. The EIS would most likely be prepared by the muni- cipality itself. See N.Y.C.R.R. § 617.8(a). The first step would be to complete a draft EIS, file a notice of completion and allow not less than 30 days for public comment. 6 N.Y.C.R.R. ~ 617..8(c). A public hearing on the draft EIS is optional. If, after the draft EIS is completed, there are no public comments submitted and it appears that the project will not have a significant environmental impact, a determination of non- significance may be made, and the environmental review process ended. Otherwise,. a final EIS must be prepared. The final EIS must address comments submitted regarding the draft EIS. After completion of the final EIS, at least 10 days must be allowed for public and agency consideration of the project before a final - 129 - decision is made by the Town or Village with respect to whether to proceed. 6 N.Y.C.R.R. ~ 617.9(a). The New York Court of Appeals has determined that SEQRA requires that the environmental review process be completed before a governmental agency may take action to approve or auth- orize the project under consideration. See Tri-County Taxpayers Association v. Town Board, 55 N.Y.2d 41, 447 N.Y.S.2d 699 (1982). This would mean that the environmental review process should be completed before the municipality's legislative body acts on the local law, resolution, or ordinance authorizing acquisition of the public utility facilities. VII. CONCLUSION The foregoing discussion represents a complete analysis of the legal issues to be confronted when contemplating alterna- tive municipalization projects of this nature. The law firm of Duncan, Weinberg & Miller, P.C., is pleased to have been able to assist in providing this report, and welcomes the opportunity to provide further information and assistance upon your request. ~-~Wallace L.'U~can DUNCAN, WEINBERG & MILLER, P.C. 1615 M Street, N.W. Suite 800 Washington, D.C. 20036 (202) 467-6370 STATE OF NEW YORK ST. LAWP.~NCE CCFJNTY COURT Plain=iff, Def~n~ann. Index NO. 59244 DY. PORT OF COMMISSIOb~RS The Town of ~4assema (hereinafter ~own) commenced an in condemnation against Niagara Mohawk Power Corporation (herein- after Niagara Mohawk) on March 13; 1975 under the New York State Comdemnation Law. Pursuant to a judgment of the St. Lawre~e County Court entered on November 20, 1978, the To~n has condemned i certain, but not all, of Niagara ~-lohawk's electrical facilities I within the Town borders. The facilities condemned regresent a minute L~ar~ of 'the total Niagara .~ohawk system. The entire syste~ serves ep~r~c{~tely, l,]00,000 electric cust~aers whereas the ~ortion of ~he system condemned serves 5j785 electrical customers. The fire~ question before ~his Ce.remission. is a dete.~minatio: of ~ valuation date. Prior to the taking of any .Drool the ~ar~les agreed ~o su~it their res.~ec=ive valuations of the proper~y in exis~ance as of June 30, 1978. Before c~n.oletion of the testimony Niagara Mohawk offered proof, which was received con~£tionally; updating i~s valuation'~o December 31, 1979. Its .murpose was to ahem additions and retirements ma~e by Niagara Mohawk to that ~a~e. The To~n, under continued objection, offered ~roof of value ~o the later date. The Town's oojection to the receilmt of this evidence was that there had no= been either a lmassage of title or the actual ~aking Of ~ossession by the Town and un, er such circ"~.tances it wocld be unfair to permit Niagara I, Mohawk to be the recipient of such inflationary factors t~hat have occurred in the interim. We determine the date of valuation ' ia June 30, 1978. Proof has been received by ~he Co~u~ission on the widest possible epec~----um, ~hracing substantially all of the Judicially approved ~riteria of value for public utility property taken in eminent domain. The problem here is complicated by t-he fact that the ~akinq cC~prises a relatively shall portion of a large public utility . a segment which must bm separated fro~ the rest and valued inheran~ly and consequentially. The proof adduced by the parties discloses vas;:ly disparate extremities of value which are ex~remely difficult to reconcile. The Town values the property it is taking and t. he consequences of that ~aki~ as 'oct ~o exceed" $1,830,000; the defendant . utility suqges~s a value over 700~ higher, in the amount of $13,764,75';. his C~mission ia required by law to consider the certificate of the Public Service C~ission which finds the earnings which the utility might reasonably expect to derive in continued operation and the rata bass and rate of return on which this projected earning ia based. (Condemnation Law, former Se==. 5-a). -2- With the filing of the Petition in condemnation the County Couxt~ pursuant to former Section 5-a of the Condemnation Law, certified the case to the ~ublic Service Commission for a determination of Niagara Mohawk's rate base in and earnings frc~ =he condemned facilities. The certifica:ion showed, as of December 31, 1974, the: as to the "measure of property sought to be taken over", t-he rate base was $1,787,546~ the rate of return 9.2~ and ~he anticipated earnings on this property $164,454. A separate rate base aa the measure of the plant used to serve Massena ~ustc~ers was certified at $5,382,539 and that anticipated earnings thereon were $495~194. The certificate was reviewed by Niagara Mohawk in a proceeding before the Appellate Division, Third Department. The certifica=e was confirmed (Matter of Niagara Mohawk Power Corp. v. public Service Cc~mission and Massena, 52 A.D. 2d 388). In confirming ~he certificate applicable to t_he property condemned here, ~he Appellate Division laid down clearly the du~y of tt~is C~-.--iseion in considering the Public Service Coeee~seion certificate. It is t. he duty of =he C6..~..~ssion to "show due regard" for the certificate, although the s=atute does not #man,ate" its full acceptance as · basis for compensation (52 A.D. 2d at 3g0). The certificate is "in aid of the Co-~-lssioners of Appraisal and of the Court", and the Court continued, is not a 'measure" which 'must o~ should" be applied in fixing ~-he award, but nevertheless it is "a yardstick to ' measure ~he Justness of =he awar~". ~us und~ ~e lan~age of ~e s~=ute and the Appellate Division's explicit reading of ~t fan.age, we weigh ~e ~oun=s s~=~ in ~e certificate in~o o= calculations of value: and l~kinq a= ~e whole record in the light of ~is r~en=~ ~e certificate must be de~ed to ~er= a ~reciatiug eff~t on the vastly l~ger ~ues sh~n els~here ~n ~ r~o~ a~ on w~ Niagara ~hawk relies. ~ ~1~ of pro~er~y of a re~la=~ i~ust~ is obvi~sly aff~ ~ ~ re~ ~2 can be ~ec~ in ~e fu~e n=~{~a~ of ~e ~ro~r~y in ~ continued conditions of r~a~. ~ one w~ld buy or invest in an iu=eres= in such ~F a= ~ price so high =ha= under the reTulation ~licy and ~ s~ of e~aluation of the pro~rty for rate m~ing, an ac~e~le re~ w~ n~ be fo~hc~ng. ~is ~lue, ~id~ ~ the condi~o~ ~rket w~14 ~ o~y r~otely affecte4 eider ~ origi~l cost or repr~uc=ion ~st of ~e pro~y util~ed. ~e con.oiling co~i4eratio~ affecting ~lue w~ld depen~ on = he manner in which ~e resisting authori=y ~oa~d ~e rele~n= costs as a ~asis f~ carnies. ~is general condition of ~e inves~ent market reflected in so~e of the proof developed in support of the ~own's theory of economic value and it is re£1acted more indirectly in sc~e of t/~e comparative sales data which have become part of the record. We have fecal=ed and consider t,kis widely ranging proof, including the certificate of the Public Service Co~,~ission Basically, there is 'no hard and fast rUle" ~hat can be stated to cover every case or fix in advance "the matters that may b~ taken in~ consideration" in determining jus~ com.Densation in condemnation. (.~atter of Board of Wa~er Su.~ply o.~ N.Y., 27? N.Y. 452, 45?-8). Nor can any rigid measure be prescribed to deter-mine "just ccm~ensat/on' under all conditions and in all cases. (U.S.v. C~odities Corp.., 339 U.S. 121, 113). A comprehensive cc~.~arison Of the relative value and accuracy of these criteria in finding just compensation was under~akeu by the Appellate Di=ision, Fourth De.~ar=ment in Onondaga County Water Authority v. New York Water Service Co. (285 A~p Div 655). l~in~ing Just compensation for public utility pro~erty taken presents, the Court felt, 'unique problems'. and~ turning to Orgel on Valuation Under Eminent Domain~ the Cour~ quoted ~he star,ant that 'The standard of compensation in utility condemnations is an ex~remely vague one." (p661) The Court's option continued: 'although many tests ars considered~ none se---= to be controlling. = The Court' quoted from U. S. v. C~xmaonwealth Corp. (339 U. S. 121, supra) that there is no "r£gid measure prescribed to determine just compensation in ~i1 !=ircu=nstanoae and in all cases. {285 App Div at 662). The Court felt there was an insufficient market 'in the usual sense, for a ~ublic utility particularly the regulated utility' to ascertain ralue fr~n the market, but it did not interdict this method. ~at ~-he Court said was: 'we must, therefore~ ~urn to other tests of value. %chat we use is largely a mat=er of judgment ~ circumstance. # (p662) This standard and this methodology. seem requ_ ired of the C~'-.--!ssion in the broadly framed scope of -hA ~reeent record. ~.ne Court surve.ved these "other tests of value". 'Original cost is admissible in evidence, but is never controlling ~r does it "carry much weight' because of the great difference ~et~een value for rate .making and for purchase or condemnation. (6~ 3u1: a/~ugh reproduction coa~s less depreciation is "more widely ~oye~" as a ~est of value, not only is it 'by no means con.-- :Lusive', but it has other shortcomings, the principal one being '-hat when used exclusively, "it ignores what might well be a freat disparity between earnings of a utility and replacement of sicai assets". This is another way of saying that =he value of reduction of assets is affected by what they will earn as well what ~--hey cost. What they earnt of co=rse; depends, as we have on what the regulatory authority accepts as value for rate The Court also no:ed that this method does not evaluate -6- The Court observed, wi~h apparent approval in theory, the ~capi~ali=ation of earnings or =he "e=on~ic" value of ,~roper=y,. which al~ough acce~ed in some jurisdiction ~s sually~en reje=t~ as "~e sole test". too, i I~:i=s l~=a=ions~ (~r~=ily because of ~e s~e~laCive fac=ors [=ele=an=, ~ticularly wheu atC~oting ~ ~eas~e the ~en ~g to ~e lan~=k ~ecision in Monon~hela Nav. :o. v. U~t~ S~tes (148 U.S. 3~, 328) t~= value is ~''~ ~e CO~= ~nside=ed, wi~ s~e re~arva=ions~ the ~ of '~i~ co~ern' ~lue a~ of severa~e value. (~6~) Fi~1~y ~e C~= ~in~ care~lly ~e ~u~se and effect of foyer Sec=. 5-a of ~e Cond~na=ion ~w. ~e "au~ de~lves u~n ~e Co~t =o give as mu~ effec~ as ~ss~le to ~ o~jecti~ s~gh= by ~e 1952 ~e~en~ to ~e :ond~tion ~w". (662) ~is r~uires cereal co~i~era~ion ~e C~sioners an~ not "li~ servx~e".'_ 'The legisla=i~ ~irec=ion is, after all, omly ~e s=a=u=o~ e~ression of ~as ~ong ~en ~e 1~ - ~t =he ca~i~li~a=io~ of ear~ings met_ho~ is a proper consideration in arriving at the value ~f a regulated public utility". Ail these alternative methods of reaching just compen- sation are reflected in t-he extensive record which has been developed before ~-%is Cc~ission. As Judge Cardozo noted in New York O. & WRy CO. v. Livinqston (238 NY 300, 306) just compensation requires fairness to the condemning authority as well as to =he owner whose property is being =aken. Compensation must be just, he noted, 'mot merely ~ the individual whose property is taken but to the public which is ~ pay f~r it", language derived from Sear1 v. sch°~l Dis~rict (133 U.S., 553, 562). It follows that the accelerating proof of value urged by Niagara Mohawk must, in fairness to the Town, be offae= by ame!iora=ing factors a~un~ant in the record. The Dis~ric~ Court= in U.S.v. Certain Interests in Prolmer=y (239 F. Supp 822, 826) discussing capitalization rate and cc~parable sales note~ that while proof of market da~a underlying that capitalization rate have "substantially discoun~cl evidence of comparable sales, never*--heless 'some of plaintiff's market clara' have been given consideration "in arriving at the final capl~alization ra=e#. Thus the expert views seem to have been synthetize~ by ~-~e Court. -8- Basically Niagara Mohawk relies on the =henry t/%a= t. he measure of damages should be reconstruction cost new less depreciation (RCNLD) whereas the Town maintains that the measure of damage should be based on original cost less depreciation (OCLD). In order =o support its theory t-he Town also offered proof on comparable sales and on an economic theory of capital- ization of earnings. Giving consideration to all the elements of value developed in the record and to the certificate of =he Public Service Con~- tssion we accept also as having a significant influence on value the proof of reconstruction cost new less depreciation. The difference between the reconstruction cost new (RC~) appraisal of ~he ~angible assets by both parties is not substant- ial. By the use of this methodology, on the vaLue=ion date of June 30, 1978 t. he Town arrived a= a figure of $7,173,910 and Niagara Mohawk concluded that the value=ion should be $7,566,150. Th~ issue between the parties turns on the depreciation fac=or to be a~lie~ to these substantially undisputed recon- struction coe~s. Here there is a wide separation of opinion based upon different methodology. The Town relies on an age-life cal- culation and Niagara Mohawk on observed conditions, maintenance practioe and age determinations. On the whole record we conclude that ~he fair value of the physical plant taken is $4,214~000. --9-- This is vary close =o our calculation of reconstruction cost new leas dapraciation of that property. There is an extremely wide spread in the "going concarn" valua of t-he property. The Tc~n contends that the value is $160,000. It appears this figure is based upon a percentage of the cost to reproduca t_he physical assets less depreciation. It has been held that using a percentage is an improper metho~ in valuing "going concern" assets. Matter Port Authority Trans- Hudson Corp. (PATH) 2C N.Y. 457: Matter of City of New York v. Fifth Avenue Coach Lines 18 N.Y. 2nd 212. Niagara Mohawk maintains that the "going concern" value of the property is $3,105,732. We regard this amount as heavily inflate~ and ac~e of the el~ments ~hat are included have little relation to t~-ue value. Fo.- example the "franchises" are valued at $~76,972. Thesa are pe~-mi~s for wires and slmilar eTaipment along public ways which cost t. he utility substantially nothing to obtain; which carry no exclusive rights in ~he public way and which se-~f to be largely valued by Niagara Mohawk on the basis of taxes paid for all purposes to lo~al governments. The sum $298,069. is claimed for "t. rained personnel". Tha record shows only 19 of fha Niagara Mohawk employees are involved, an infinitesimal part of defendant's personnel. The proportion of employees affected is so smal~ in tala=ion to ~he -i0- ii whole ros.ter =ha= changes in t. his proportion would be likely' to occur in any even=. Taken =oge~har, =he damages for =hess ~wo elemen=e is nc~inal. and t-he cos= of acquiring ~he righUs-of-way, we find the value to be $410,000. On ~he value of lands Oaken in fee and t-he value of the p'ern~anen= easemen=s there is aqain a wide spread between the claim for $209,586 asserted by Niagara Mohawk an~ =he value co~eded by the Town in the amoun= of $39,000. Wa find excessive the values a=~ribu=ed b.v Nisgara Mohawk =o permanen= easemen=s and the value a=~ribu=ed =o =he land oaken in ~ee as if separa=ed from existing etA-uc~ures.. Taking these two inems =ogether wa fine =ha value =o be $105,000. Very substan=ial consequan=ial damages are sough= by Niagara Mohawk for the oos= of constructing an en=irely new ~ransformer plan= called Plum Brook at a cos= of $1,875,905. The theory of this consequence of the ~aking is =,ha= Niagara MOhawk will ~eed to hav~ i~-~ o~n fully ¢on~rollad ~ransformer equipman= =o service i=s r~ining cu~tcmera ou=eide the =o~n. I= is suggested that i= would not be sound utility practica =o depend on ~he t. rans~orming an~ transmitting facilities hereafter ~o be owned and con=rolled by the Town to perform this ~unction. But technically and functionally the facilities now in place and operating and hereafter to be o~ned by the Town were designed and se= up by the utility to service =he area both inside ~he To~n and outside ~_he Town for which latter area the cost of a n~w parallel facility is sough=. This we-find to be an unnecessary and fruitless expense. ~eason~hle a~.~....~lation and co-Operation in ~he use of the To~n*s facilities integrated with Niagara ~ohaw~s exis~ng equipment could read/ly continue unimpaired ~he present flow of po~er ~o ~ Town's customers and the utility's cust~aers. Niagara .~ohawk's p .urported apprehensions concerning the reliability of this flow of .Dower £or which nearly two million dollars in ~-ge are sought are largely chimerical. ."~ne l~wn has offered to provide this service and to assume the necessary burden of continuing to provide it. Consequently no allowance is made for this element of the claim. ~or do we allow severance d~gss relating to the Bro~ming and An~=e~s substations which ara no= ~aken in condemnation and which re~ain the proper~y of the utility. These subs~a=ionu will continue ~o l~arform in ~he operation of the ut:ilit~'s plant substantially the same function in servicing of the utilAty's =e~aining area customers. Here again, con=inued successfu~ Operation of these ~wo substations now functioning well in an i~t~gra=e~ facility is a matter of reasonable ,:o-operation and acc=renoVation baleen the ~wo systems. The Town has offered ~o pay the defendant for such use of its facilities as may be necessary., we are required to recognize the equities of both parties and ~he defendant is r~ired to mitigate ~amagee where t,his can reasonably be accomplished. We £i~ ~ co~sequential d~m~ge to the -Niagara Mohawk affecting ~he Browning and Andrews substations which =amain in its title an~ control. Consequential d~mage to =he land retained by Niagara ..Hohawk we find to be $12,000 and consequential damage to the bui/~ings retained to be $10,00O. We fi~ the ~al d~ge attributed to the taking for all of the el~ent~ to ~e $4,751,000.00. Dated: August · ~980.