Connect with CP&DR

facebook twitter

Follow us on Facebook and Twitter

Court Calls LAFCO Approval Necessary For Special District Service Expansion

An irrigation district that provides wholesale electricity may not begin providing retail electric service without approval of the Local Agency Formation Commission, the Third District Court of Appeal has ruled.

In a related decision, the Third District also ruled that the irrigation district may not depose two members and the executive officer of the Local Agency Formation Commission (LAFCO) for the district's lawsuit regarding denial of the retail electric service application. Both decisions bolster the authority and integrity of LAFCOs.

In 2005, the South San Joaquin Irrigation District sought approval from the San Joaquin Local Agency Formation Commission (SJ LAFCO) to provide retail electric service. The district already provided irrigation water service and wholesale electric generation and electricity marketing services. The district sells electricity from three hydroelectric dams to Pacific Gas & Electric (PG&E). The district proposed to acquire PG&E's distribution facilities through a negotiated purchase or eminent domain, and to sell the electricity directly to users.

Not surprisingly, PG&E opposed the application and raised the question of whether this would be an appropriate use of eminent domain. Staff of the SJ LAFCO recommended approval of the application, but the LAFCO board voted 4-1 to deny it in June 2006. Although they officially rejected the proposal because the district "did not demonstrate its administrative, technical and financial capabilities to provide retail service to the satisfaction of the Commission," at least two commissioners focused on the issue of eminent domain. They did so despite a warning from the Commission's attorney that potential use of eminent domain could not be a factor in SJ LAFCO's decision.

The irrigation district then sued SJ LAFCO, arguing both that the Commission's approval was unnecessary, and that retail electricity would not be a new service. The district also sought to depose Commissioners Jack Sieglock and Gary Giovanetti and Executive Officer Bruce Baracco (none of whom is still associated with the Commission). PG&E intervened in the litigation.

San Joaquin County Superior Court Judge Elizabeth Humphreys ruled against the district, concluding that SJ LAFCO's approval was necessary for the special district to exercise a latent power such as providing retail electric service. While Humphreys based her decision on the administrative record, she also ruled that the district could depose Sieglock, Giovanetti and Baracco. The judge limited the inquiry to "all unprivileged information that the deponents had prior to June 15, 2006, including information obtained from third parties (including but not limited to PG&E), and what additional information the Commissioner deponents needed to recommend adoption of the staff recommendation to approve the project."

The Commission, which had fought the deposition request, appealed the ruling on the depositions, while the district appealed the ruling on the application.

The issue of LAFCO approval of the application centered on interpretation of legislation passed in 2001 — AB 948 (Kelly), which was essentially a cleanup of the 2000 overhaul of the LAFCO law known as the Cortese-Knox-Hertzberg Act (see CP&DR, September 2000). Among other things, AB 948 added §§ 56824.10 through 56824.14 to the Government Code. Those sections concern LAFCO proceedings "for the exercise of new or different functions or classes of services by special districts."

The district argued that it has long had the right under the Water Code to provide retail electric services and, therefore, LAFCO approval was unnecessary. In a different line of argument, the district contended that the provisions in AB 948 were permissive, not mandatory.

A three-judge panel of the Third District disagreed. It determined that retail electric service would be an expansion of the district's services. And the court ruled that interpreting the AB 948 provisions as permissive "would be nonsensical. There would be no point in establishing a detailed, timely and costly procedure for LAFCO approval if a disappointed applicant could simply disregard the decision of LAFCO and proceed with its plan to provide a new or different service."

On the issue of depositions, the court ruled there was no reason to employ an exception to the rule that such suits are decided by reviewing the administrative record.

"Limiting review to the administrative record is appropriate due to the scope of review," Justice Fred Morrison wrote for the court. "An action or proceeding to attack a determination of SJ LAFCO ‘extends only to whether there was fraud or a prejudicial abuse of discretion. Prejudicial abuse of discretion is established if the court finds the determination or decision is not supported by substantial evidence in light of the whole record,'" Morrison continued, citing Government Code § 56107, subdivision (c).

The irrigation district argued depositions were necessary because SJ LAFCO appeared to base its decision on information not in the administrative record. But if that were true, the record would not support the decision and the court could overturn LAFCO, Morrison noted. Here, the district appeared to want to learn what additional information would change the commissioners' minds.

"While the district argues there is some secret category of information it did not know was needed," Morrison wrote, "we read the commissioners' remarks as simply stating they were not persuaded by the district's proposal. The denial was on the merits. If the district had a stronger case to make, reasonable diligence required the district to make that case at the hearing."

The Cases:
South San Joaquin Irrigation District v. Superior Court, No. C056661, 2008 DJDAR 5703; San Joaquin Local Agency Formation Commission v. Superior Court, No. C056463, 2008 DJDAR 5708. Both filed April 22, 2008.
The Lawyers:
For the district: Martin Fineman, Davis Wright Tremaine, (415) 276-6500.
For SJ LAFCO: Daniel Schroeder, Neumiller & Beardslee, (209) 948-8200.
For Pacific Gas & Electric: Michael M. Berger, Manatt, Phelps & Phillips, (310) 312-4000.