In re Application of Northeast Neb. Pub. Power Dist.

Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
07/06/2018 01:10 AM CDT
- 237 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
In re A pplication of Northeast Neb. Pub. Power Dist.
Northeast Nebraska Public Power District
et al., appellants, v. Nebraska P ublic
Power District, appellee.
___ N.W.2d ___
Filed June 15, 2018. No. S-17-529.
1. Nebraska Power Review Board: Arbitration and Award: Appeal and
Error. On an appeal from the decision of an arbitration board convened
under Neb. Rev. Stat. § 70-1301 et seq. (Reissue 2009), trial in the
appellate court is de novo on the record.
2. Nebraska Power Review Board: Arbitration and Award: Evidence:
Appeal and Error. Despite de novo review, when credible evidence is
in conflict on material issues of fact, the appellate court will consider
and may give weight to the fact that the arbitration board under Neb.
Rev. Stat. § 70-1301 et seq. (Reissue 2009) observed the witnesses and
accepted one version of the facts over another.
3. Jurisdiction: Appeal and Error. Before reaching the legal issues
presented for review, it is the duty of an appellate court to determine
whether it has jurisdiction over the matter before it.
4. ____: ____. An appellate court has an independent duty to decide juris-
dictional issues on appeal, even if the parties have not raised the issue.
5. Jurisdiction: Words and Phrases. Subject matter jurisdiction is the
power of a tribunal to hear and determine a case in the general class or
category to which the proceedings in question belong and to deal with
the general subject matter involved.
6. Jurisdiction. A lack of subject matter jurisdiction may be raised at any
time by any party or by the court sua sponte.
7. Jurisdiction: Appeal and Error. When a trial court lacks the power,
that is, jurisdiction, to adjudicate the merits of a claim, an appellate
court also lacks the power to adjudicate the merits of the claim.
8. Arbitration and Award: Jurisdiction: Statutes. An arbitration board
under Neb. Rev. Stat. § 70-1301 et seq. (Reissue 2009), as a creature
- 238 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
of statute, has only such authority as has been conferred upon it
by statute.
9. Statutes: Legislature: Intent. Components of a series or collection of
statutes pertaining to a certain subject matter are in pari materia and
should be conjunctively considered and construed to determine the
intent of the Legislature, so that different provisions are consistent, har-
monious, and sensible.
10. Public Utilities. Persons receiving similar service from a public power
district under similar circumstances cannot be charged for such service
in an arbitrary, designed, dissimilar manner.
11. Contracts: Parties. The implied covenant of good faith and fair dealing
exists in every contract and requires that none of the parties to the con-
tract do anything which will injure the right of another party to receive
the benefit of the contract.
12. ____: ____. The nature and extent of an implied covenant of good faith
and fair dealing are measured in a particular contract by the justifiable
expectations of the parties. Where one party acts arbitrarily, capriciously,
or unreasonably, that conduct exceeds the justifiable expectations of the
second party.
13. ____: ____. A violation of the covenant of good faith and fair dealing
occurs only when a party violates, nullifies, or significantly impairs any
benefit of the contract.
Appeal from the Power Review Board. Affirmed.
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
- 239 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
who renewed their contractual relationship, some nonrenewing
customers initiated statutory arbitration. They alleged that the
discount was discriminatory and an abuse of NPPD’s statu-
tory 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 con-
tract or the covenant of good faith. Accordingly, we affirm the
arbitration board’s decision.
II. BACKGROUND
1. Overview of Wholesale
R ate 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 serv­
ice should be provided by nonprofit entities including public
power districts, public power and irrigation districts, nonprofit
electric cooperatives, and municipalities.”3 Public power dis-
tricts 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 dis-
pute 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
1
See Neb. Rev. Stat. § 70-655(1) (Cum. Supp. 2016).
2
§ 70-1301.
3
Id.
4
See §§ 70-655(1) and 70-1302.
5
See 1979 Neb. Laws, L.B. 207.
6
See § 70-1302.
7
See § 70-1304.
8
See § 70-1306.
- 240 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
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 tes-
timony 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 deci-
sion 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 politi-
cal 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 sub-
divisions engaged in the distribution of electricity to retail
electric customers. They are wholesale customers of NPPD.
9
See § 70-1307.
10
See § 70-1318.
11
See § 70-1320.
12
See § 70-1321.
13
See § 70-1325.
14
See § 70-1326.
15
§ 70-1327.
- 241 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
Purchasers are parties to NPPD’s 2002 wholesale power con-
tract (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
- 242 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
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 disad-
vantage 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 custom-
ers the same general firm power service rate. But as an incen-
tive to get customers to execute a new contract, NPPD created
a discount for renewing customers. Thus, the 2016 WPC pro-
vides 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 finan-
cial 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 asso-
ciated with benefits earned for past service.
NPPD then explored its options for accounting and report-
ing of OPEB. One was continuation of “pay-as-you-go.” This
had the lowest impact on rates. However, because of a per-
ception 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
- 243 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
required contribution into 1 year’s rates. That would mean add-
ing 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 liabil-
ity 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 mil-
lion. 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 cre-
ated 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 enti-
ties such as NPPD to recognize the entire OPEB as a “hard”
liability on its balance sheet. Because the statement recom-
mended early implementation, NPPD chose to do so for the
2016 year end.
4. 2016 and 2017 R ates
The inclusion of the $25 million in OPEB catch-up expense
resulted in a 3.7-percent increase for 2016 rates. Wholesale
- 244 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
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 a complaint against NPPD before the arbi-
tration board. They alleged that NPPD violated § 70-655(1),
claiming that the 2016 rate was discriminatory. Purchasers
alleged that the 2016 rate was formulated and implemented
in breach of the 2002 WPC. They further claimed that NPPD
breached the implied covenant of good faith and fair dealing
by charging them a different rate. They sought declaratory
relief and damages. Purchasers later filed an amended com-
plaint to challenge the 2017 rate on similar grounds.
At a hearing, the arbitration board received extensive evi-
dence. We will discuss the evidence in more detail in the analy-
sis section of the opinion.
6. A rbitration Board’s Decision
The arbitration board determined that the 2016 and 2017
rates were reasonable. It stated that the OPEB catch-up
amounts were reasonable, because they related to the value of
the service rendered to purchasers during their years of tak-
ing service from NPPD. It further stated that NPPD did not
arbitrarily select the amounts to include in the catch-up, but,
rather, those amounts were “the product of a systematic study
of the actuarial liability of OPEB attributable to production-
level services.”
The arbitration board also determined that the 2016 and
2017 rates were nondiscriminatory. It reasoned that the dis-
count merely deferred the collection of the 2016 and 2017
catch-up amounts for customers under the 2016 WPC. The
board explained:
Customers under the 2002 WPC and the 2016 WPC
are taking the same service from NPPD and charged
- 245 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
the same rate. The customers operate under two sepa-
rate and differing contracts, fairly negotiated. The 2016
customers gave up some rights they had under the 2002
WPC and accepted new terms including the deferred
collection of the OPEB Catch-Up amounts included
in the 2016 and 2017 rates. Customers under the 2016
WPC have over 18 years left in their comm[i]tment to
NPPD, whereas [purchasers] have just over 4 years. This
differentiated approach is fair and reasonable as relat-
ing to the collection of a liability that solely relates to
past services.
Finally, the board determined that NPPD did not breach the
2002 WPC or the covenant of good faith and fair dealing. The
board therefore denied all of purchasers’ requests and deter-
mined that the 2016 and 2017 rates met the standards estab-
lished by § 70-655(1).
Purchasers appealed, and we granted their petition to bypass
review by the Nebraska Court of Appeals.
III. ASSIGNMENTS OF ERROR
Purchasers assign that the arbitration board erred in (1) fail-
ing to find NPPD’s 2016 and 2017 wholesale rate structure
violated § 70-655(1), (2) failing to find NPPD’s 2016 and 2017
wholesale rate structure breached the 2002 WPC, and (3) fail-
ing to find NPPD violated the duty of good faith and fair deal-
ing under the 2002 WPC.
IV. STANDARD OF REVIEW
[1,2] On an appeal from the decision of an arbitration board
convened under § 70-1301 et seq., trial in the appellate court is
de novo on the record.16 Despite de novo review, when credible
evidence is in conflict on material issues of fact, the appellate
court will consider and may give weight to the fact that the
trial court observed the witnesses and accepted one version of
16
§ 70-1327.
- 246 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
the facts over another.17 We apply this same rule in an appeal
from an arbitration board under this statutory scheme.
V. ANALYSIS
1. Jurisdiction
[3,4] Before reaching the legal issues presented for review,
it is the duty of an appellate court to determine whether it has
jurisdiction over the matter before it.18 Neither party challenges
the arbitration board’s jurisdiction to decide the matters pre-
sented to it. But an appellate court has an independent duty to
decide jurisdictional issues on appeal, even if the parties have
not raised the issue.19
[5-7] Subject matter jurisdiction is the power of a tribunal
to hear and determine a case in the general class or category
to which the proceedings in question belong and to deal with
the general subject matter involved.20 A lack of subject matter
jurisdiction may be raised at any time by any party or by the
court sua sponte.21 When a trial court lacks the power, that
is, jurisdiction, to adjudicate the merits of a claim, an appel-
late court also lacks the power to adjudicate the merits of
the claim.22 We begin by considering whether the arbitration
board had subject matter jurisdiction over the issues presented
to it.
The parties presented three issues to the arbitration board,
and those same three issues are before us on appeal. The issues
17
See Mock v. Neumeister, 296 Neb. 376, 892 N.W.2d 569 (2017). See,
also, In re Interest of Steven S., 299 Neb. 447, 908 N.W.2d 391 (2018);
Erin W. v. Charissa W., 297 Neb. 143, 897 N.W.2d 858 (2017); Strohmyer
v. Papillion Family Medicine, 296 Neb. 884, 896 N.W.2d 612 (2017);
Lingenfelter v. Lower Elkhorn NRD, 294 Neb. 46, 881 N.W.2d 892 (2016).
18
Boyd v. Cook, 298 Neb. 819, 906 N.W.2d 31 (2018).
19
Davis v. State, 297 Neb. 955, 902 N.W.2d 165 (2017).
20
Boyd v. Cook, supra note 18.
21
Id.
22
Cappel v. State, 298 Neb. 445, 905 N.W.2d 38 (2017).
- 247 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
concern the validity of NPPD’s rate structure, whether NPPD
breached its contract with purchasers, and whether NPPD
breached the covenant of good faith and fair dealing. Because
this case was brought under § 70-1301 et seq., we must deter-
mine whether the arbitration board had subject matter jurisdic-
tion over all of the issues.
[8] The arbitration board, as a creature of statute, has only
such authority as has been conferred upon it by statute.23
Statutes have clearly empowered an arbitration board to deter-
mine a wholesale electric rate dispute.24 But it is less clear
whether the arbitration board also has jurisdiction over the
contractual issues presented in this case.
[9] Reading the statutes in §§ 70-1301 to 70-1329 as a
whole leads us to conclude that the arbitration board’s juris-
diction is not limited to deciding a dispute over the establish-
ment of a wholesale rate. Components of a series or collection
of statutes pertaining to a certain subject matter are in pari
materia and should be conjunctively considered and construed
to determine the intent of the Legislature, so that different
provisions are consistent, harmonious, and sensible.25 One
section empowers the board to resolve not just wholesale rate
disputes but also “rate disputes relating to transmission and
delivery of electrical energy.”26 A dispute may address “all or
any portion of the wholesale electric charge.”27 The dispute
could concern a “mathematical, metering, or quantity error
in the billing.”28 And that the arbitration board may consider
more than merely the wholesale rate to be charged is implicit
in the Legislature’s directive that the parties meet with the
23
See, generally, Interiano-Lopez v. Tyson Fresh Meats, 294 Neb. 586, 883
N.W.2d 676 (2016).
24
See, e.g., §§ 70-1302, 70-1304, 70-1306, and 70-1307.
25
In re Trust of Shire, 299 Neb. 25, 907 N.W.2d 263 (2018).
26
§ 70-1302.
27
§ 70-1304. See, also, § 70-1305 (“disputed portion”).
28
§ 70-1304.
- 248 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
arbitration board “for the purpose of clarifying and narrowing
the specific issues from those set forth in the detailed state-
ment of disputed issues.”29
An arbitrated dispute may be intertwined with contractual
issues. The Legislature clearly contemplated the existence of
power contracts.30 Often, such contracts speak to amounts that
may be charged for electricity. In order to resolve a dispute,
an arbitration board may need to determine whether there was
contractual compliance. The arbitration board has authority to
“consider only those matters necessary for the resolution of the
disputed issues” but it may “not alter or modify any existing
contract.”31 We conclude that where, as here, contractual issues
are intertwined with a rate dispute, such contractual issues are
within the arbitration board’s jurisdiction.
We note that no party is attacking the constitutionality of
the statutes contained in §§ 70-1301 to 70-1329. We express
no opinion on the relationship of these statutes to the juris-
diction conferred upon a district court under the Nebraska
Constitution.32
2. Whether R ate Structure
Violates § 70-655(1)
(a) Additional Evidence at Hearing
NPPD presented considerable evidence concerning its
efforts to address its unfunded OPEB liability. NPPD’s whole-
sale billing manager testified that if NPPD had collected the
full unfunded OPEB obligation of $150 million in 1 year, it
would have resulted in a rate increase of over 22 percent—
a much larger rate increase than the 3.7 percent that was
implemented. The manager testified as to the amounts of
purchasers’ pro rata shares of OPEB that they could avoid by
29
§ 70-1312.
30
See §§ 70-1303, 70-1304, and 70-1314.
31
See § 70-1314.
32
See Neb. Const. art. V, § 9.
- 249 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
reducing their purchases under the 2002 WPC. In the aggre-
gate, purchasers potentially could avoid $3,750,000 of their
pro rata share of the $150 million OPEB catch-up collection.
The manager emphasized fairness and reasonableness and
stated that because the costs were associated with past serv­
ice, NPPD needed to find a way to recover the costs from all
of its customers who had benefited from them. He believed
that NPPD’s methodology was reasonable because it tried to
recover the unfunded obligation over a 6-year period, which
was the remaining time period in the 2002 WPC.
NPPD’s chief financial officer testified that in 2016, NPPD
borrowed approximately $23 million on behalf of the 2016
WPC customers by issuing taxable debt to generate bond pro-
ceeds. The interest on the borrowing was capitalized through
2021. NPPD borrowed a similar amount under similar terms
for the 2017 catch-up. The chief financial officer explained
that purchasers and customers under the 2016 WPC “are both
being charged the exact same rate, except for the 2016 con-
tract customers I have borrowed their pro rata share and made
that deposit into the OPEB trust and I’ve recorded a regula-
tory asset that says they will have to pay that beginning in
2022.” Because the rates are identical, the difference in what
is charged and collected is a function of the discount. With the
discount, OPEB gets paid from two sources: contributions from
ratepayers and investment earnings in the trust.
According to the chief financial officer, the purpose of
the discount would be “deferring the collection of that 2016
and now 2017 catch-up amount until 2022 through 2033, the
same time period.” She explained that the wholesale custom-
ers would pay the same amount, but it would be collected
over a different time period. In order for the delayed pay-
ments to equate to a payment today, NPPD would have to
apply a discount rate between 3.37 and 3.9 percent. The chief
financial officer testified that the discount was “a mechanism
to fairly collect the OPEB catch-up from two different cus-
tomer groups.”
- 250 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
Purchasers’ expert, David Dismukes, a consulting econo-
mist, viewed purchasers and the customers under the 2016
WPC as similarly situated in terms of the nature of the power
service they receive from NPPD. Dismukes testified that cus-
tomers can be charged different rates, but that the rates “have
to be justifiable and there has to be a cost basis for that.”
Dismukes opined that the rate structure created discrimina-
tion between the two sets of customers. He explained that simi-
larly situated customers were being assessed rates that differed
for taking similarly situated services. According to Dismukes,
there were no cost differences between the two groups of cus-
tomers. The signing of the 2016 WPC was the only difference,
and Dismukes did not believe that the execution of a new
contract justified a different rate. He testified that there was
no legitimate cost basis supporting the discount mechanism.
Based on Dismukes’ knowledge of the industry, he believed
that a discount for one subset of customers and not the other
constituted rate discrimination.
From a cost-based rate-setting perspective, Dismukes dis-
agreed with testimony to the effect that both groups would
ultimately pay the same amount. He pointed out that “a dollar
today is not the same as a dollar tomorrow” and that there was
a benefit to not making the payment today. He testified that
the timing difference created an economic advantage of suffi-
cient consequence to support a finding of discrimination. Thus,
Dismukes opined that NPPD did not set its rates in a manner
that was fair, reasonable, and nondiscriminatory.
NPPD’s expert, Joseph Mancinelli, the general manager
and president of a consulting firm specializing in management
economics predominantly serving the public power market,
disagreed. He opined that NPPD’s 2016 and 2017 rates were
fair, reasonable, and nondiscriminatory. In arriving at that
conclusion, he looked at the unfunded accrued OPEB liability,
which was incurred over a historical period and was directly
attributed to the labor of retirees. He testified that it was
proper to recover those costs from customers who enjoyed
- 251 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
those benefits, i.e., the 2002 WPC and 2016 WPC customers.
Mancinelli believed that the rates were adequate and would
support the revenue requirement.
Mancinelli explained that there was one rate and that the
difference was the source of the funding of the OPEB liability.
Because the 2016 WPC customers had a long contract, the cost
was financed. But financing was not an option for the 2002
WPC customers, so the funding came out of rate revenues. He
stated that the source of the funds created a difference and that
difference “is the genesis of what we call the discount.”
Mancinelli believed that the cost of borrowing the money
was not materially different from the discount. He testified that
the discount was cost based and that it was basically the dif-
ference between funding the trust with cash from revenues or
funding the trust with borrowed funds. Mancinelli was unaware
of any other utility imposing a rate increase for the exclusive
purpose of collecting money for an OPEB trust. Although
NPPD’s situation and solution was unique, he opined that it
met the test of being fair, reasonable, and nondiscriminatory.
(b) Discussion
Purchasers contend that the rate structure for 2016 and 2017
violates § 70-655. That statute requires NPPD’s board of direc-
tors to fix adequate rates that are “fair, reasonable, nondis-
criminatory, and so adjusted as in a fair and equitable manner
to confer upon and distribute among the users and consumers
. . . the benefits of a successful and profitable operation and
conduct of the business of the district.”33 As the party claiming
discrimination, purchasers have the burden of proof to estab-
lish its existence.34
[10] Purchasers rely on McGinley v. Wheat Belt P.P. Dist.35
In that case, a wholesale distributor informed Wheat Belt
33
§ 70-655(1).
34
See 12 Eugene McQuillin, The Law of Municipal Corporations § 35:57
(3d ed. 2017).
35
McGinley v. Wheat Belt P.P. Dist., 214 Neb. 178, 332 N.W.2d 915 (1983).
- 252 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
Public Power District (Wheat Belt) that the distributor would
be imposing a surcharge on Wheat Belt, which would be
assessed on the basis of Wheat Belt’s summer peak demand.
To deal with the surcharge, Wheat Belt created two classes of
customers based on the date the customer requested service.
Customers before a certain date would be protected from
increased costs associated with the surcharge, on the theory
that it was the new customers who were causing the increased
summer peak demand. As a result, Wheat Belt charged mark-
edly different rates for customers receiving similar service. We
concluded that Wheat Belt’s action in establishing two classes
of customers and assessing most of the surcharge to one class
was arbitrary and discriminatory. We stated, “Persons receiv-
ing similar service under similar circumstances cannot be
charged for such service in an arbitrary, designed, dissimi-
lar manner.”36
McGinley is distinguishable from the situation at hand.
There, Wheat Belt wanted to assess the bulk of a surcharge
against one class of customers. To do so, it wanted to charge
different rates to similarly situated customers. Here, NPPD is
charging but one rate—purchasers are charged the same rate
as NPPD’s customers under the 2016 WPC. The difference
between the amounts charged to purchasers and the 2016 WPC
customers is attributable to a discount for the 2016 WPC cus-
tomers. Of course, under some circumstances, charging one
rate but conferring a discount upon some customers could be
discriminatory. But here, as discussed below, there was a rea-
sonable basis for NPPD’s ratemaking determination.
The discount is tied to the OPEB liability. That liability
relates solely to past services of NPPD employees, and pur-
chasers received the benefit of those services. Because a spe-
cific portion of OPEB cannot be connected to any particular
customer, NPPD allocated the liability on a pro rata basis.
It is reasonable for purchasers to pay their pro rata share of
36
Id. at 187, 332 N.W.2d at 920.
- 253 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
the liability. And the catch-up amounts, which were based on
actuarial studies, are not arbitrarily established.
There is a reasonable basis for the discount. If a variance in
rates is based upon a reasonable and fair difference in condi-
tions that equitably and logically justifies a different rate, any
discrimination is not unjust.37 Purchasers opted not to extend
their contractual relationship with NPPD; thus, NPPD had a
shorter period of time in which to collect purchasers’ pro rata
share of the liability. On the other hand, customers under the
2016 WPC extended their relationship with NPPD for an addi-
tional 20 years, thereby giving NPPD a longer period of time
over which to collect those customers’ pro rata share.
NPPD crafted a plan to collect the OPEB catch-up expense
at different times. Under the plan, purchasers pay their por-
tion of the OPEB catch-up expense over the 6 years remaining
on their contract, while customers under the 2016 WPC get a
discount during those years and will pay the catch-up expense
between 2022 and 2033. It is the difference in the remaining
terms of the contractual relationship with NPPD between pur-
chasers and customers under the 2016 WPC that allows for the
different collection of the OPEB liability. The effort to fund the
OPEB trust through catch-up amounts in 2016 and 2017 was
an effort to mitigate the risk of shifting the cost of the com-
mon liability onto the customers under the 2016 WPC. Under
the circumstances of this case, the discount for one group of
customers is not discriminatory.
The methodology assured that both classes of customers
would pay an equal share of OPEB costs—the difference
would be solely in the timing of the payments. Contrary to
purchasers’ argument, the financing scheme imposed a future
cost sufficient to remedy the advantage that the 2016 WPC
customers otherwise would have had from paying their share
later. In other words, an approximation of the time value of
37
See 14 William Meade Fletcher, Fletcher Cyclopedia of the Law of
Corporations § 6681 (Carol A. Jones ed., perm. ed., rev. vol. 2012).
- 254 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
money was built into the mechanism employed to ensure that
both classes of customers were treated fairly. In evaluating
the experts’ testimony, the arbitration board had the advan-
tage of observing them and making judgments considering
their credibility. We have considered and given weight to
that fact.
3. Whether R ate Structure
Breached 2002 WPC
Purchasers next argue that the discount constitutes a breach
of the 2002 WPC. It does not. Under the 2002 WPC, purchas-
ers agreed to pay “amounts reasonably required to be set aside
in reserves for items” such as OPEB. The catch-up amounts
were reasonably within the definition of revenue requirements.
This assignment of error lacks merit.
4. Whether R ate Structure Breached
Covenant of Good Faith
[11,12] Finally, purchasers argue that the discount breached
the covenant of good faith and fair dealing. The implied cov-
enant of good faith and fair dealing exists in every contract
and requires that none of the parties to the contract do any-
thing which will injure the right of another party to receive the
benefit of the contract.38 The nature and extent of an implied
covenant of good faith and fair dealing are measured in a par-
ticular contract by the justifiable expectations of the parties.
Where one party acts arbitrarily, capriciously, or unreasonably,
that conduct exceeds the justifiable expectations of the sec-
ond party.39
[13] Purchasers claim that giving a discount to the 2016
WPC customers penalized purchasers for exercising their con-
tractual right to purchase energy elsewhere. We disagree. The
availability of the discount was not connected to whether a
38
Coffey v. Planet Group, 287 Neb. 834, 845 N.W.2d 255 (2014).
39
Id.
- 255 -
Nebraska Supreme Court A dvance Sheets
300 Nebraska R eports
IN RE APPLICATION OF NORTHEAST NEB. PUB. POWER DIST.
Cite as 300 Neb. 237
customer reduced or limited its energy purchases from NPPD;
rather, it was available to all customers under the 2016 WPC. A
violation of the covenant of good faith and fair dealing occurs
only when a party violates, nullifies, or significantly impairs
any benefit of the contract.40 Purchasers did not have a right
to avoid paying amounts toward unfunded accrued liability
for OPEB. They have failed to show that NPPD significantly
impaired any benefit of the 2002 WPC.
VI. CONCLUSION
We conclude that NPPD’s rate structure for 2016 and 2017
was fair, reasonable, and nondiscriminatory. We further con-
clude that the rate structure did not constitute a breach of either
the 2002 WPC or the implied covenant of good faith and fair
dealing. Accordingly, we affirm the decision of the arbitra-
tion board.
A ffirmed.
Wright and Miller-Lerman, JJ., not participating.
40
Id.