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
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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(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
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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).
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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
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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.
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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.