Supreme Court Invites Solicitor General’s Comment on Montana Rent-for-Riverbeds Case

In deciding whether to accept review of a case with implications for power companies and private property owners throughout the West, the U.S. Supreme Court recently invited comment from the Acting Solicitor General of the United States on a Montana Supreme Court ruling that requires a hydroelectric dam operator to pay the State of Montana nearly $40 million in back rent for the use of state-owned riverbeds. The dam operator, PPL Montana, LLC (“PPL”), has petitioned the Court to review PPL Montana, LLC v. State of Montana (“PPL Montana”),[1] in which the Montana Supreme Court concluded that the State obtained title to the riverbeds beneath PPL’s dams because the rivers in question were “navigable” at the time of statehood. Calling the decision an “enormous uncompensated land grab by state court judges,” PPL argues in its petition for certiorari that the Montana Supreme Court incorrectly applied the test for determining navigability (also known as the “navigability-for-title” test) and argues that the State’s claims are preempted by the federal statute governing hydroelectric dams – the Federal Power Act (“FPA”). According to PPL, the decision will not only strip away the rights of thousands of private property owners, but may also tempt other States to “follow Montana’s lead” in asserting ownership of the rivers within their borders. The Supreme Court’s invitation, known as a Call for the Views of the Solicitor General (or “CVSG”), does not guarantee that the Court will grant review, although it does indicate that it is seriously considering the issues raised in the petition.

Background

PPL Montana focuses on ten federally-licensed hydroelectric dams on the Missouri, Madison, and Clark Fork rivers in the State of Montana. In 2003, parents of Montana schoolchildren sued the dams’ owner, PPL, in federal court, arguing that PPL owed the state compensation because the riverbeds underlying its dams were part of Montana’s “school trust lands.” The State of Montana joined the suit in 2004, asserting that PPL also owed the State compensation pursuant to Montana’s Hydroelectric Resources Act (“HRA”).[2] The federal district court eventually dismissed the action for lack of diversity, and PPL filed suit in state court seeking a declaration that the FPA preempted the State’s HRA claims. The State counterclaimed, arguing that it obtained title to the relevant streambeds at the time of statehood pursuant to the “equal footing doctrine.”[3] In a series of summary judgment opinions, the trial court dismissed PPL’s affirmative defenses, held that the State obtained title to the riverbeds at issue because those rivers were navigable at the time of statehood, and concluded that the State was entitled to retroactive lease payments under the HRA. Following a bench trial to determine damages, the court imposed approximately $40 million in back lease payments, as well as future lease payments imposed by the State.

The Underlying Decisions

In the trial court and on appeal, PPL argued that the State did not own the riverbeds beneath its dams, and that even if it did the State’s claims for compensation were preempted by federal law.

Navigability-for-Title

Pursuant to the equal footing doctrine, the State of Montana gained title to the land beneath “navigable” rivers within its borders when it joined the Union in 1889. The U.S. Supreme Court explained the test for determining whether a river was navigable at the time of statehood in United States v. Utah:

The rule long since approved by this court in applying the Constitution and laws of the United States is that streams or lakes which are navigable in fact must be regarded as navigable in law; that they are navigable in fact when they are used, or are susceptible of being used, in their natural and ordinary condition, as highways for commerce, over which trade and travel are or may be conducted in the customary modes of trade and travel on water; and further that navigability does not depend on the particular mode in which such use is or may be had-whether by steamboats, sailing vessels or flatboats-nor on an absence of occasional difficulties in navigation, but on the fact, if it be a fact, that the stream in its natural and ordinary condition affords a channel for useful commerce.[4]

On summary judgment, the State presented evidence that the rivers in question were in fact used, or were susceptible of being used, as highways of commerce at the time of statehood including: (1) historical descriptions of navigation on the rivers; (2) government studies conducted during the 1970s and 1980s regarding navigability; (3) evidence regarding navigability from prior administrative and judicial proceedings; and (4) evidence of the rivers’ present-day usage. PPL opposed, presenting expert testimony that the dams were located on stretches of river, such as the Great Falls Reach on the Missouri, where navigation was impossible. PPL also argued that evidence of present-day usage was irrelevant, presenting expert testimony to show that the flow of the rivers had changed since statehood.[5]

The district court interpreted the U.S. Supreme Court’s navigability-for-title test to be “somewhat ‘fluid,’” concluding that evidence of present-day usage informed the question of navigability at the time of statehood.[6] The district court also concluded that unnavigable stretches of river, such as portages or waterfalls, did not defeat navigability, “so long as the river itself was used, or [was] susceptible of being used, as a channel of commerce at the time of statehood.”[7] In granting summary judgment to the State, the court held that the State had presented “considerable evidence” of navigability and that PPL’s expert testimony did not raise a genuine issue of material fact.[8]

On review, the Montana Supreme Court agreed, upholding summary judgment against PPL. The court rejected PPL’s assertion that certain portions or segments of an otherwise navigable stretch of river could be unnaviagable due to the presence of falls or rapids, such as those found on Great Falls Reach. Although the court acknowledged that the Supreme Court’s Utah decision assessed navigability on a “section-by-section basis,” the court interpreted the test to evaluate whether there were “long reaches of non-navigability” and not “short interruptions” in an otherwise navigable stretch.[9] The court concluded that PPL’s evidence of “relatively short interruptions of navigability” in the rivers in question was insufficient as a matter of law to declare portions of the rivers non-navigable. The Court also concluded that evidence of the present-day usage of the rivers demonstrated that the rivers were susceptible of being used for commerce in 1889.[10]

Federal Preemption

The preemption issue in PPL Montana focused on whether the FPA, which authorizes the Federal Energy Regulatory Commission (“FERC”) to grant licenses for the construction, operation, and maintenance of hydroelectric dams, preempted Montana’s HRA, which addresses the use of state-owned lands for hydroelectric projects. The trial court concluded that the FPA established a “dual system” of control between the states and the federal government regarding hydroelectric dams: “[W]hile the FPA grants FERC the ultimate authority to license a hydroelectric project in accordance with federal law, it explicitly permits the operation of state law with regard to ‘proprietary rights’ which may be affected by a FERC-licensed facility.”[11] The district court rejected PPL’s as-applied challenge, concluding that although the FPA preempted a licensing provision in the HRA that conflicted with federal law,[12] the remaining sections of the Montana Act provided state with authority to seek compensation for the hydroelectric use of state-owned lands. The Montana Supreme Court agreed, concluding that the core of the HRA’s remaining sections were compensatory, rather than regulatory, in nature and were therefore not preempted by the FPA’s reach.[13]

PPL’s Petition for Certiorari

On August 12, 2010, PPL petitioned for Supreme Court review regarding two aspects of the Montana Supreme Court’s decision: (1) whether the court correctly interpreted and applied the navigability-for-title test, and (2) whether the court correctly determined that the FPA did not preempt Montana’s claims under the HRA.

PPL’s petition challenges the Montana Supreme Court’s application of the navigability-for-title test, arguing that the court should have considered navigability on a section-by-section basis, rather than considering the navigability of each river “as a whole.”[14] By doing so, PPL asserts that Montana PPL has exacerbated a “long-simmering conflict” among lower courts regarding the navigability-for-title test, pitting many federal and state courts applying the section-by-section analysis of navigability against other state courts that have adopted the “river as a whole” approach.[15] PPL asserts that Supreme Court review is necessary to settle this conflict and because PPL Montana’s “brazen disregard” for federal law threatens to “upend the long-settled expectations of private property owners and the federal government.”[16]

PPL also faults the Montana Supreme Court for misconstruing the preemptive reach of the FPA.[17] The petition argues that the FPA imposes a “complete scheme of national regulations” – rules which envision state participation during the planning stages of the dam-licensing process.[18] PPL contends that, contrary to this clearly defined role, the HRA “directly and irrevocably conflicts” with the FPA because it imposes state lease requirements and economic viability assessments. Even if not preempted on its face, PPL argues that the FPA preempts the HRA’s application to the dams in question because FERC (with Montana’s input) licensed and relicensed PPL’s hydropower projects on the assumption that the federal government owned title to the riverbeds. PPL asserts that Montana’s recent attempt to “bait-and-switch” would upend the “baseline assumptions behind PPL’s federal licenses and saddle[] the licensed projects with extreme economic burdens.”[19] According to PPL: “Whatever the precise bounds of permissible state regulation, the [FPA] surely preempts a State from retroactively imposing leasing obligations for extended periods of time during which neither the licensee nor FERC had any notice of any claim for compensation—and no reason to believe compensation was owed.”[20]

Conclusion

The Supreme Court issued the CVSG on November 1, 2010; however, the Court’s rules do not mandate a deadline for the government’s response. As noted above, the invitation does not guarantee that the Court will accept certiorari, but it does suggest that the Court is seriously evaluating the issues raised in the petition. If PPL’s claims regarding the decision’s potential impact are correct, denial of review may expose power companies to state court litigation seeking compensation for the use of state-owned riverbeds and may embolden states to assert title to private and federal property to the riverbeds within their borders.

For more information regarding PPL Montana, LLC v. State of Montana, please contact Russell Prugh.