Ne. Neb. Pub. Power Dist. v. Neb. Pub. Power Dist. (In re Ne. Neb. Pub. Power Dist. )

300 Neb. 237

912 N.W.2d 884

IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.

Northeast Nebraska Public Power District et al., appellants,

v.Nebraska Public Power District, appellee.

No. S-17-529.

Supreme Court of Nebraska.

Filed June 15, 2018

Steven D. Davidson and David C. Levy, of Baird Holm, L.L.P., for appellants.

Kile Johnson and Corey Wasserburger, of Johnson, Flodman, Guenzel & Widger, and John C. McClure, of Nebraska Public Power District, for appellee.

Heavican, C.J., Cassel, Stacy, and Funke, JJ., and Steinke, District Judge.

Cassel, J.

I. INTRODUCTION

This is our first opinion addressing an appeal from an arbitration board’s decision under Neb. Rev. Stat. §§ 70-1301 to 70-1329 (Reissue 2009). After Nebraska Public Power District (NPPD) provided a discount to wholesale customers who renewed their contractual relationship, some nonrenewing customers initiated statutory arbitration. They alleged that the discount was discriminatory and an abuse of NPPD’s statutory rate-setting authority,¹ but the arbitration board disagreed. Upon our de novo review, we conclude that the discount was reasonable and not arbitrary and that it did not breach the contract or the covenant of good faith. Accordingly, we affirm the arbitration board’s decision.

II. BACKGROUND

1. OVERVIEW OF WHOLESALE RATE DISPUTE PROCESS

Nebraska’s public policy is to "provide adequate electrical service at as low overall cost as possible, consistent with sound business practices."² To further that policy, "electric service should be provided by nonprofit entities including public power districts, public power and irrigation districts, nonprofit electric cooperatives, and municipalities."³ Public power districts are required by law to fix rates which are fair, reasonable, and nondiscriminatory.⁴

In 1979, the Legislature enacted §§ 70-1301 to 70-1329⁵ to provide a method to quickly and fairly resolve wholesale electric rate disputes.⁶ If a wholesale purchaser elects to dispute a portion of the wholesale electric charge established by a supplier⁷ and the dispute remains unresolved 45 days after the supplier receives written notice of the dispute, the dispute shall be submitted to arbitration.⁸ The arbitration board is composed of three members: one selected by the purchaser, one selected by the supplier, and a third selected by the other two arbitrators.⁹ At a hearing, the arbitration board hears testimony and receives evidence relating to the dispute.¹⁰ Within 30 days after completion of the hearing, the arbitration board shall render a written decision.¹¹ And within 5 days of the date of the decision, the arbitration board shall file the decision along with all the pleadings and exhibits with the secretary of the Nebraska Power Review Board.¹²

A party who is unsatisfied with the arbitration board’s decision may appeal to reverse, vacate, or modify the decision.¹³ To do so, the party must file a notice of appeal with the Nebraska Power Review Board within 30 days after the arbitration board’s decision is filed with the Nebraska Power Review Board.¹⁴ "Trial in the appellate court shall be de novo on the record."¹⁵ As noted, this is our first such decision concerning such an appeal from the arbitration board. We now turn to the facts of the case.

2. CONTRACTS

NPPD, a public power district, derives the majority of its revenue from wholesale power supply contracts with political subdivisions in Nebraska. These wholesale power supply contracts often are the largest single financial obligation of the purchasing political subdivision.

The appellants (hereinafter purchasers) are political subdivisions engaged in the distribution of electricity to retail electric customers. They are wholesale customers of NPPD.

Purchasers are parties to NPPD’s 2002 wholesale power contract (2002 WPC).

The 2002 WPC included a 20-year term beginning on January 1, 2002. After December 31, 2021, the 2002 WPC would automatically renew from year to year unless terminated with 5 years’ notice by either party.

The 2002 WPC obligated wholesale customers to purchase their full energy requirements from NPPD for the first 6 years of the contract. After that point, a wholesale customer could limit or reduce its purchases of demand and energy from NPPD in varying amounts depending on the length of advance notice provided to NPPD. To limit purchases meant that a customer could continue to buy power in the same amount as on the date of its notice to NPPD, but that it would not buy any future growth in its electricity from NPPD going forward. To reduce purchases meant that the customer could purchase less than its full requirements from NPPD. The 2002 WPC imposed no fee or rate increase in exchange for the privilege to limit or reduce purchases. Each purchaser had given, or intended to give, notice to NPPD of its intention to limit or reduce its purchases, which reductions would commence at various times on and after January 1, 2017.

The 2002 WPC listed different types of costs that NPPD was authorized to include in its revenue requirement for rate-setting purposes. One such cost was "amounts reasonably required to be set aside in reserves for items of costs the payment of which is not immediately required, such as ... post-retirement employee benefit reserves." Thus, the 2002 WPC allowed NPPD to include in its revenue requirements a reasonable amount to be set aside for other postemployment benefits (OPEB). OPEB are benefits promised to employees once they retire. They are unfunded liabilities associated with past service.

In 2009, NPPD formed a contract strategy team to look at options for extension of the 2002-era contracts. NPPD desired more certainty in its revenue stream than that provided by the 2002 WPC. And NPPD believed that the provisions of the 2002 WPC permitting customers to limit or reduce their purchases would allow some customers to economically disadvantage others.

In 2013, NPPD initiated negotiations to replace the 2002 WPC with a new standard wholesale contract. The negotiations resulted in a 20-year contract beginning on January 1, 2016, and ending on December 31, 2035 (2016 WPC). A customer under the 2016 WPC could not limit or reduce its purchases unless NPPD failed to meet certain performance standards. NPPD decided to charge extending and nonextending customers the same general firm power service rate. But as an incentive to get customers to execute a new contract, NPPD created a discount for renewing customers. Thus, the 2016 WPC provides a rate discount through December 31, 2021, at an amount to be approved by the NPPD board of directors. Purchasers did not execute the 2016 WPC.

3. FUNDING OPEB OBLIGATION

Prior to 2007, NPPD funded its OPEB obligation on a "pay-as-you-go" basis. In 2007, the Governmental Accounting Standards Board implemented Governmental Accounting Standards Board Statement No. 45. This statement required NPPD to use actuaries to calculate and identify its unfunded OPEB liability and include those amounts in notes to its financial statements. It allowed NPPD to amortize the unfunded OPEB liability over a period up to 30 years. The statement also introduced the concept of the annual required contribution, which is the theoretical amount, if contributed consistently each year, that would fully prefund future retiree benefits associated with benefits earned for past service.

NPPD then explored its options for accounting and reporting of OPEB. One was continuation of "pay-as-you-go." This had the lowest impact on rates. However, because of a perception that NPPD was not addressing the liability, it had the potential for a negative response from rating agencies and the investment community. Another option was to put the annual required contribution into 1 year’s rates. That would mean adding approximately $36 million as a revenue requirement in the rate-setting process and collecting the full sum from customers in rates within a 1-year period. A third option was to borrow money toward the OPEB liability. NPPD could borrow money, and the debt service from the borrowing would be added into the revenue requirements used to set rates.

At that point, NPPD adopted a plan to obtain additional funding in rates. Under the plan, NPPD would continue on the pay-as-you-go basis for 2007. Through rates, NPPD would collect $4 million over the pay-as-you-go amount between 2008 and 2013, and then $10 million above the pay-as-you-go amount thereafter. The money would fund an OPEB trust, which was projected to be fully funded by 2033.

By 2011, actuarial studies showed that NPPD would need to contribute more in order to have the liability funded by 2033. NPPD decided to accelerate the collection of the OPEB liability to the 6-year term remaining in the 2002 WPC. Otherwise, based on purchasers’ notifications of reductions, purchasers would be able to avoid 40 percent of their pro rata share of the OPEB obligation. NPPD estimated the liability to be $155 million. To collect that amount over 6 years, NPPD increased the annual budgeted contribution to the OPEB trust by $25 million. NPPD referred to it as a "catch-up."

The Governmental Accounting Standards Board also created Governmental Accounting Standards Board Statement No. 75, which became effective for fiscal years ending after June 2017. This statement no longer permitted disclosure of OPEB in notes to the financial statements; it required entities such as NPPD to recognize the entire OPEB as a "hard" liability on its balance sheet. Because the statement recommended early implementation, NPPD chose to do so for the 2016 year end.

4. 2016 AND 2017 RATES

The inclusion of the $25 million in OPEB catch-up expense resulted in a 3.7-percent increase for 2016 rates. Wholesale customers who elected to sign the 2016 WPC received a 3.57-percent discount on the rate in 2016. The 2017 rate similarly included $25 million for accelerated funding of the OPEB trust and a discount for customers who signed the 2016 WPC.

5. COMPLAINT

Purchasers filed...