Court of Appeals overturns ruling in Baxter/BPU franchise case: Baxter cannot require franchise fees from BPU, court states
The latest move in the franchise fee lawsuit between the city of Baxter and Brainerd Public Utilities came Monday, July 15, when the Minnesota Court of Appeals ruled in favor of BPU and the city of Brainerd, overturning a district court judge’s previous judgment.
The issue started in February 2016, when the Baxter City Council voted to impose franchise fees on its three utility providers -- Minnesota Power, Crow Wing Power, and BPU. The fees, collected from the companies’ Baxter customers, were intended to help pay for street maintenance and street lighting costs in the city.
BPU collected the fees and paid them to Baxter for three months in September, October and November 2016. Todd Wicklund, BPU secretary/finance director, said Wednesday he believes the total fees collected in those three months were $12,471.79.
In December 2016, the payments to Baxter stopped. Baxter then filed a complaint in Crow Wing County District Court in December 2017 seeking enforcement of the franchise fees.
Though payments to Baxter stopped after three months, BPU continued collecting the franchise fees from its Baxter customers and began to put them in an escrow account overseen by the county court. Wicklund said there is $200,854.49 in the account now.
With more than $539,000 anticipated in annual costs to prolong street pavement life, Baxter began looking at adding franchise fees in 2016 to pay the bill. Franchise fees provided an option to offset a budget dilemma as an alternative to taxes. Baxter noted the local option sales tax revenues could not be used for maintenance. The yearly impact for residences with the franchise fee was expected to be $60 with a small commercial customer paying $240 annually.
Baxter set the monthly BPU fees at $3 for residential, $13 for commercial, $52 for demand and $138 for large power. Commercial customers that use more than 2,500 kilowatt hours each month are billed for both kilowatt hours and kilowatts (demand). The demand charge is determined during the highest 15 minute period of electric usage during the month.
John Baker, attorney for BPU and the city of Brainerd in this case, said BPU continued collecting the money as a precautionary measure, even though it didn’t agree with Baxter’s ordinance. This way, if the court does ultimately rule in favor of Baxter, BPU has the money available to pay and does not have to come up with a large sum all at once. If the courts end up favoring BPU, both Wicklund and Baker said the money will be returned to the BPU customers charged the franchise fees.
In September 2018, 9th District Court Judge Earl Maus ruled the city of Baxter is authorized by state statute to require franchise fees from BPU for operating within Baxter’s boundaries despite the area being within BPU’s service area.
Court of Appeals Judge Randall Slieter, however, reversed the decision Monday, noting several statutes influencing his decision.
First came the issue of whether BPU can technically qualify as a municipality, which Baxter asserted against because BPU does not only operate within Brainerd city limits.
BPU is a municipal utility company owned by the municipality of Brainerd. Under Minnesota Statute 216B.36, a public utility that furnishes utility services to a municipality may be required to obtain a license, permit, right or franchise fee. This requirement may, Slieter wrote, include the public utility company paying fees to the municipality (in this case Baxter) to raise revenue or defray increased municipal costs accruing as a result of utility operations.
Municipal utilities, however, are exempt from this regulation. But because BPU operates in Baxter, which is outside of its municipality’s border, Baxter asserted BPU should not be recognized as a municipal utility.
But because Baxter’s theory challenges the Legislature’s policy, Slieter wrote the court does not have jurisdiction to add anything the Legislature may have purposefully omitted or inadvertently overlooked.
“This court is limited to ‘correcting errors’ and not creating policy,” Slieter wrote, noting any change to a statute’s language must come from the Legislature itself.
Baxter also asserted BPU should not be considered a municipal utility because it has an independent commission that operates and can act on its own outside the city of Brainerd. Slieter negated this claim for three reasons:
The Brainerd treasury retains revenue from BPU’s operations.
The Brainerd City Council approves BPU’s exercise of power to appoint and employ individuals to perform BPU’s duties.
The Brainerd City Council exercises authority to approve BPU’s budget.
“Given the manner by which Brainerd controls BPUC (Brainerd Public Utilities Commission), its existence as a separate entity does not deprive its status as a municipal utility,” Slieter wrote.
Next, because the Brainerd Water and Light Department (now BPU) began servicing the area that is now Baxter in 1935, before the city of Baxter was incorporated in 1939, Slieter wrote BPU is not required to pay franchise fees to Baxter.
This, Baker said, meant BPU did not need Baxter’s consent to enter into the market.
“And therefore if we didn’t need their consent to enter the market, we didn’t have to pay anything to them that would be the price of participating in the Baxter market,” Baker added.
This opinion is opposite of the one Maus gave in 2016, when he said the court found insufficient support of BPU being “grandfathered” in and able to operate in Baxter without the city’s consent in the form of a franchise fee.
Though the Court of Appeals asserts Baxter cannot collect revenue-raising franchise fees from BPU, Baker said Baxter does have a law in place regulating BPU’s use of city roadways.
“What that ordinance does is to say you (utility companies) have got to get a permit in order to be able to start putting up an orange sign and dig up the street here or there,” Baker said. “And you have to pay a fee that’s based upon what the actual expenses to the city are.”
Baker said he credits Baxter for coming up with the law, which he said is a very good one.
The 2016 ordinance, he added, was an attempt to build upon the 2010 ordinance and raise city revenue.
Baxter now has 30 days from Slieter’s ruling to appeal the decision to the Minnesota Supreme Court.
When asked about the issue Monday night, Baxter Mayor Darrel Olson said he had not read through the ruling yet, but the city planned to set up a meeting with legal counsel to decide what to do moving forward. Olson said he was disappointed with the court of appeals’ decision but had no further comment.
If Baxter does choose to continue litigation, Baker said the Supreme Court usually only decides to hear a “really small” percentage of court of appeals cases, but he noted it’s hard to predict what might happen in this case. If the Supreme Court does take the case, Baker estimates another year of litigation.
Both Brainerd and Baxter have insurance through the League of Minnesota Cities, which covers a portion of the expenses for both sides. Both cities will likely still have to pay deductibles and portions of the legal fees incurred, but Baker said he doesn’t know those amounts at this time, as they would likely be calculated after all litigation is complete.
If Baxter chooses not to appeal to the Supreme Court, or if the Supreme Court denies the appeal, thus ending the litigation, Baker said BPU would ideally like to be made whole for the $12,471 it already paid to Baxter in franchise fees under the illegal ordinance, though he said he is not sure if a lawsuit against Baxter on behalf of BPU and the city of Brainerd would be in the cards.