PPL MONTANA, LLC v. State

March 30 2010

DA 08-0506

IN THE SUPREME COURT OF THE STATE OF MONTANA

2010 MT 64

PPL MONTANA, LLC, a Delaware

Limited Liability Company,

Plaintiff and Appellant,

v.

STATE OF MONTANA,

Defendant and Appellee.

APPEAL FROM: District Court of the First Judicial District,

In and For the County of Lewis and Clark, Cause No. CDV-2004-846

Honorable Thomas C. Honzel, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Robert L. Sterup, Kyle Ann Gray, Holland & Hart LLP, Billings, Montana

Paul J. Lawrence (argued), K&L Gates LLP, Seattle, Washington

For Appellee:

Hon. Steve Bullock, Montana Attorney General, Anthony Johnstone

(argued), Solicitor, Helena, Montana

For Amici Association of Gallatin Agricultural Irrigators:

David L. Weaver, Nash, Zimmer, Weaver & Grigsby, Bozeman, Montana

For Amici Montana Water Resources Association:

Holly Jo Franz (argued), Franz & Driscoll, Helena, Montana

For Amici Montana Farm Bureau Federation:

Hertha L. Lund, Arthur V. Wittich, Wittich Law Firm, P.C.,

Bozeman, Montana

For Amici School Trust Representatives:

Pamela D. Bucy, Harley R. Harris, Luxan & Murfitt, PLLP,

Helena, Montana

Argued: September 16, 2009

Submitted: October 27, 2009

Decided: March 30, 2010

Filed:

__________________________________________

Clerk

2

Justice Patricia O. Cotter delivered the Opinion of the Court.

¶1 On June 13, 2008, the First Judicial District Court entered findings of fact and

conclusions of law in a cause of action between PPL Montana, LLC (PPL), and the State

of Montana (State). The District Court ordered PPL to pay the State $40,956,180 for its

use of state-owned riverbeds from 2000 through 2007, at PPL hydroelectric power sites

on the Missouri, Madison, and Clark Fork rivers. We affirm the District Court’s award of

damages.

FACTUAL AND PROCEDURAL BACKGROUND

¶2 PPL is a Delaware limited liability company registered to do business in Montana.

PPL is a wholesale electric generator1 and owns and operates a number of

federally-licensed hydroelectric facilities, or dams, in Montana. A number of these dams

are located on the Missouri, Clark Fork, and Madison rivers. The “Thompson Falls

Project” is located on the Clark Fork River and was built in 1915. This facility was

initially licensed by the federal government in 1949, and was re-licensed in December

1979 by the Federal Energy Regulatory Commission (FERC), pursuant to its authority

under the Federal Power Act (FPA), 16 U.S.C.A. §§ 791a-823d (West 2010). The Ryan,

Cochrane, Morony, Rainbow, and Black Eagle dams are located on the Missouri River in

Cascade County, Montana. The Black Eagle facility was built in 1891, the Rainbow

facility in 1910, the Ryan facility in 1915, the Morony in 1930, and the Cochrane in

1

In State, Dept. of Revenue v. PPL Montana, LLC, 2007 MT 310, 340 Mont. 124, 172 P.3d

1241, we explained that PPL is an “exempt wholesale generator.” This means that PPL is not

subject to regulation by state public utility regulatory agencies, and may sell its electricity at

whatever price the wholesale market will bear. PPL Montana, LLC, ¶ 23.

3

1958. The Holter and Hauser dams are located on the Missouri River in Lewis and Clark

County, and were completed in 1918 and 1907, respectively. The Madison facility is

located on the Madison River in Madison County and was completed in 1906.

Additionally, the Hebgen facility, which was completed in 1915, is located on the

Madison River in Gallatin County and provides storage capacity for downstream power

generation.2 The dams on the Madison and Missouri rivers are collectively referred to as

the “Missouri-Madison Project” and were relicensed by FERC on September 27, 2000.

The Thompson Falls and Missouri-Madison Projects were previously owned by the

Montana Power Company (MPC), and sold to PPL on December 17, 1999.

¶3 On October 17, 2003, the parents of Montana school children sued PPL3 in the

United States District Court of Montana, seeking compensation for its use of state-owned

riverbeds at its hydroelectric generation facilities. The plaintiffs argued that the riverbeds

occupied by PPL’s dams were part of the school trust lands and that PPL was obligated to

compensate the State for their use. In Montanans for the Responsible Use of the School

Trust v. State, 1999 MT 263, 296 Mont. 402, 989 P.2d 800 (Montrust), we defined

“school trust lands” as state-owned public lands which the State Land Board (Land

Board) is obligated to administer as a trustee for the benefit of the public schools in

2

A storage facility such as Hebgen Dam is built on the upstream end of a hydroelectric project

and has the ability to capture and store water that might otherwise be spilled downstream. This

stored water can be released over time and used to generate electricity at downstream facilities in

order to maximize productive output.

3

The federal case, as well as the state case sub judice, also named two other Montana-based

hydroelectric companies, Avista and PacifiCorp, as defendants. Both of these companies joined

in PPL’s challenges to the State’s complaint in District Court, but settled with the State prior to

trial. Although both of these companies filed numerous motions which were ruled upon by the

District Court, because they were dismissed prior to trial and did not have a judgment entered

against them, we will refer only to PPL in this Opinion.

4

Montana. See Montrust, ¶¶ 13-14. Under Article X of the Montana Constitution, the

Land Board’s fiduciary obligations include obtaining full market value for the use of

school trust lands. Montrust, ¶ 17. Prior to this time, neither PPL nor its predecessor

MPC had ever paid compensation to the State for the use of the riverbeds associated with

its dams.

¶4 Although the State had never previously sought compensation for the use of the

state-owned riverbeds by MPC or PPL, the State decided to join in the federal suit against

PPL and was granted leave to do so on June 18, 2004. The State filed its own complaint

requesting compensation from PPL under the school trust theory argued by the original

plaintiffs, and also under the Hydroelectric Resources Act (HRA), Title 77, chapter 4,

part 2, MCA. Originally enacted by the Legislature in 1931, § 77-4-201, MCA, of the

HRA reads as follows:

It is unlawful to sell or advertise for sale state lands constituting power sites

or part of power sites capable of developing hydroelectric energy in

commercial quantities. However, the [Land Board] may issue a lease or

license to any person, corporation, or municipality for the development of

power sites and the distribution, use, and disposition of the electrical energy

generated on the sites as specifically provided in this chapter.

¶5 The term “power site” is specifically defined in the HRA as follows:

The words “power site” as used in this part shall mean not only the

state-owned land on which the dam is constructed, but also each separate

tract of such land which will become part of the reservoir and which in and

of itself makes an essential contribution to the value of the power site as a

whole of not less than 5% of the entire value of such power site.

Section 77-4-202, MCA.

5

¶6 The federal cause of action was eventually dismissed for lack of subject matter

jurisdiction. Prior to the dismissal of the federal suit, PPL filed a declaratory judgment

action against the State in the First Judicial District Court on November 12, 2004. In its

complaint, PPL contested the State’s ability to seek compensation for its use of riverbeds

at its FERC-licensed dams on the Clark Fork, Missouri, and Madison Rivers. PPL sought

a declaration that the State could not seek compensation for its use of the riverbeds

because these claims were federally preempted by the FPA as well the “federal

navigational servitude.”

¶7 The “federal navigational servitude” is the power of the United States Congress to

ensure that navigable rivers remain open to interstate and foreign commerce. This

servitude applies to navigable rivers acquired by states upon their entrance into the

Union, and extends to all state-owned lands below the high-water mark. See Mont. v.

United States, 450 U.S. 544, 551, 101 S. Ct. 1245, 1251(1981); United States v. Chicago,

Milwaukee, St. Paul & Pac. R.R. Co., 312 U.S. 592, 596-97, 61 S. Ct. 772, 775 (1941).

PPL argued that the existence of this servitude over the Clark Fork, Missouri, and

Madison Rivers preempted the operation of the HRA upon its dams. Additionally, PPL

sought declarations regarding several affirmative defenses, arguing that: (1) it had

acquired a prescriptive easement to use the riverbeds at its facilities; (2) the State was

equitably estopped from asserting a right to compensation under the HRA; (3) the State’s

ability to seek payments was barred by laches and the applicable statute of limitations;

6

and (4) the State breached agreements reached with PPL in the course of licensing its

hydroelectric facilities. 4

¶8 On November 24, 2004, the State answered, denying that the HRA was preempted

by the FPA or by the federal navigational servitude. The State also counterclaimed

seeking a declaration that PPL must compensate the State for its use of state lands, and

seeking damages for PPL’s unlawful past and ongoing use of those lands without

compensation to the State. The State asserted that the Missouri, Clark Fork, and Madison

Rivers were navigable rivers at the time of statehood, and that it acquired title to the beds

and banks of these rivers when it became a state in 1889 under the “equal footing

doctrine.”5 The State claimed that its ownership rights in these riverbeds and the HRA

gave it the right to seek compensation for PPL’s use of the occupied or submerged state

lands used by its facilities. Additionally, the State argued that it was entitled to an award

of damages under the theories of uncompensated use of state land, unjust enrichment,

trespass, and negligence.

¶9 On the same day it filed its complaint, the State moved for summary judgment on

PPL’s complaint. The State asserted that neither the FPA nor the federal navigational

servitude prevented it from seeking compensation for PPL’s use of state lands. The State

4

Affirmative defenses are normally asserted in response to a “preceding pleading.” See

M. R. Civ. P. 8(c). In this case, PPL asserted affirmative defenses in its initial complaint.

Although this is unusual, it is most likely explained by the fact that the federal suit between PPL

and the State involved the same claims which PPL sought to litigate in state court in Montana.

Thus, PPL was already aware of the nature of the State’s claims and had already formulated its

defenses.

5

The “equal footing doctrine” holds that a state acquires title to the streambeds of navigable

rivers within its borders upon entrance to the Union. See Opinion, ¶ 22.

7

claimed that both the FPA and the FERC licensing procedures contemplated that

landowners should be compensated for the use of their land under state law and

affirmatively permitted, rather than preempted, the compensation the State was seeking.

Additionally, the State argued that it was not subject to PPL’s legal and equitable

defenses.

¶10 From this point in the proceedings, PPL and the State engaged in an extensive

motion practice. With some exceptions, these motions sought summary judgment rulings

from the District Court on various aspects of the case. Because the instant appeal stems

in large measure from the District Court’s rulings on these motions, we will describe

them now in chronological order.

Memorandum and Order of April 14, 2006, Regarding the State’s Motion

for Summary Judgment on PPL’s Declaratory Judgment Action

¶11 In its April 14, 2006 Memorandum and Order, the District Court granted summary

judgment in favor of the State on PPL’s declaratory judgment action. First, the District

Court concluded that the State’s claims for compensation were not preempted by the

federal navigational servitude. As noted above, see Opinion, ¶ 7, the federal navigational

servitude is the power of Congress to ensure that navigable waters remain open to

interstate and foreign commerce. Citing to Fed. Power Commn. v. Niagara Mohawk

Power Corp., 347 U.S. 239, 74 S. Ct. 487 (1954), the District Court observed that the

exercise of the federal navigational servitude requires clear authorization from Congress.

In Niagara, the Supreme Court held that Congress had not given such clear authorization

under the FPA. See Niagara, 347 U.S. at 249-51, 74 S. Ct. at 493-94. The District Court

8

noted that federal courts interpreting the FPA have specifically held that it recognizes the

property rights of parties whose land is affected by federally-licensed hydroelectric

projects, and expressly prohibits the use of private property without proper compensation.

See United States v. Cent. Stockholders’ Corp. of Vallejo, 52 F.2d 322, 331-32 (9th Cir.

1931) (discussing the applicability of the FPA regarding property rights created under

state law); Public Utility Dist. No. 1 of Pend Oreille Co. v. City of Seattle, 382 F.2d 666,

671-72 (9th Cir. 1967) (same). Accordingly, the District Court concluded that the federal

navigational servitude did not preempt the State’s claims for compensation.

¶12 The District Court also concluded that the FPA did not preempt the State’s ability

in general to seek compensation for PPL’s use of state-owned riverbeds. The District

Court noted the three types of federal preemption under Montana law: express, field, and

conflict. See Vitullo v. Int. Bhd. Of Elec. Workers, Local 206, 2003 MT 219, ¶ 14, 317

Mont. 142, 75 P.3d 1250. In Vitullo, we described these forms of preemption as follows:

This Court recognizes three ways in which federal law may preempt

state law. The first is by express preemption, wherein Congress includes a

preemption clause providing that state law will not apply in the area

governed by the federal statute. Absent express preemption, this Court

recognizes two types of implied preemption. The first is “field

preemption,” wherein the scheme of federal regulation is so pervasive or

comprehensive that it is reasonable to infer that Congress intended to

“occupy the field” and leave no room for supplementary state regulation.

The second type of implied preemption is “conflict preemption.” Conflict

preemption manifests itself as an inability of state law to comply with

federal law or where state law stands as an obstacle to the accomplishment

and execution of the full purposes and objectives of Congress.

9

Vitullo, ¶ 14 (citing Dukes v. Sirius Constr., Inc., 2003 MT 152, ¶ 20, 316 Mont. 226, 73

P.3d 781; Favel v. Am. Renovation and Constr. Co., 2002 MT 266, ¶ 40, 312 Mont. 285,

59 P.3d 412).

¶13 The District Court concluded that express preemption did not apply because the

FPA did not contain any language expressly preempting state law. The District Court

also concluded that neither field preemption nor conflict preemption barred the State’s

claims under the HRA.

¶14 Relying on First Iowa Hydro-Electric Coop. v. Fed. Power Commn., 328 U.S.

152, 66 S. Ct. 906 (1946), the District Court noted that the FPA establishes a “dual

system” of control between the states and the federal government. First Iowa, 328 U.S.

at 167-68, 66 S. Ct. at 913. The FPA grants FERC the authority to issue licenses for the

construction, operation, and maintenance of dams, including the power to regulate

regarding the engineering, economic, and financial soundness of such facilities. First

Iowa, 328 U.S. at 172, 66 S. Ct. at 915-16. However, the FPA also preserves the role of

state law within the federal licensing structure. For instance, one section of the FPA

requires an applicant for a FERC license to demonstrate that it has complied with the

requirements of state law with respect to the “beds and banks and to the appropriation,

diversion, and use of water for power purposes” for the state in which the proposed

projected is located. First Iowa, 328 U.S. at 161 n. 6, 66 S. Ct. at 910 n. 6 (quoting 16

U.S.C. § 802); see also 16 U.S.C.A. § 821 (West 2010).

¶15 Moreover, federal courts have concluded the FPA recognizes the validity of state

property rights and contemplates compensation for property use under state law. For

10

instance, in Jordan v. Randolph Mills, Inc., 716 F.2d 1053 (4th Cir. 1983), the Fourth

Circuit recognized that a FERC license “neither transfers nor diminishes any right of

possession or enjoyment possessed by” a landowner, and that use of another’s property

by a FERC-licensee requires either acquisition of the owner’s rights or the use of the

power of eminent domain. Jordan, 716 F.2d at 1055. Additionally, the District Court

noted that the FPA specifically requires licensees to notify any party who is an owner of

record of any interest covered by a proposed project, including state, federal, and

municipal entities. 16 U.S.C.A. § 802(b) (West 2010). The FPA also requires the

licensee to submit information about the price paid for water rights, rights-of-way, lands,

or interests in lands. 16 U.S.C.A. § 797(b) (West 2010). Further, federal courts have

concluded that the FPA itself specifically allows property owners to bring state law tort

actions against a licensee for damages caused by a hydroelectric facility pursuant to 16

U.S.C. § 803(c). See Nez Perce Tribe v. Idaho Power Co., 847 F. Supp. 791, 812 (D.

Idaho 1993) (stating that under 16 U.S.C. § 803(c) Congress did not preempt property-

based state common law claims against FERC licensees); DiLaura v. Power Auth. of the

State of N.Y., 982 F.2d 73, 78 (2d. Cir. 1992) (same). In other words, while 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. See First Iowa, 328 U.S. at

175-76, 76 S. Ct. at 917. Accordingly, the District Court concluded that the FPA did not

preempt the State’s compensation claims against PPL.

11

¶16 The District Court also rejected the argument that the HRA was preempted by the

FPA. As noted above, the HRA contains a section which authorizes the Land Board to

enter into a lease with entities that use “power sites” within Montana for the generation of

hydroelectric power. See Opinion, ¶¶ 4-5. However, Section 203 of the HRA reads as

follows:

In issuing any lease or license under the provisions of this part, the board

shall have the power and it shall be its duty to incorporate in the lease or

license such reasonable restrictions and regulations as it finds necessary in

order to protect the interest of the state and its people.

Section 77-4-203, MCA.

¶17 PPL argued that Section 203 was an impermissible attempt by the State to regulate

its FERC-licensed facilities, and that this section rendered the entire HRA preempted.

The District Court agreed that Section 203 was preempted by federal law, but concluded

that, given the FPA’s clear recognition of state property rights, the FPA did not preempt

those aspects of the HRA which empowered the State/Land Board to seek compensation.

The District Court rejected the argument that the State’s efforts to receive compensation

through a lease with PPL somehow represented an impermissible infringement upon the

federal government’s licensing and regulatory authority under the FPA. As stated by the

District Court,

The Utilities take the position that merely asking them to sit down

and negotiate a lease with the State constitutes regulation preempted under

the Federal Power Act. However, the Court cannot accept this position. It

would make no sense to reserve property rights under the Federal Power

Act and then hold that any process to vindicate those rights is preempted.

The ability to negotiate the terms and conditions of a lease is an incident of

ownership all property owners possess. The Utilities cite a number of cases

under the doctrines of field or conflict preemption in support of their

12

position. However, none of the cases are property cases, nor do they hold

that a state is preempted from enforcing its property rights.

(Citations omitted.)

¶18 In sum, the District Court concluded that the FPA did not occupy the field or

otherwise conflict with the State’s efforts to seek compensation from PPL. However, the

District Court declined to rule to on PPL’s “as-applied” challenge to the HRA on federal

preemption grounds, concluding that resolution of this question presented factual issues

requiring a more developed record.

¶19 In this same order, the District Court also granted the State’s motion for summary

judgment on PPL’s affirmative defenses. See Opinion, ¶ 7. With respect to PPL’s claim

for a prescriptive easement, the District Court noted that under Montana law a party

cannot obtain title to government property through adverse possession or use. See e.g.

Roe v. Newman, 162 Mont. 135, 142, 509 P.2d 844, 848 (1973) (citing Bode v. Rollwitz,

60 Mont. 481, 199 P. 688 (1921)). Regarding PPL’s equitable estoppel defense, the

District Court concluded that the State cannot be estopped by the unauthorized acts or

representations of its officers or agents. See Norman v. State, 182 Mont. 439, 444, 597

P.2d 715, 718 (1979). Because no state employee would have the authority to make

representations about the disposal of trust land in a manner contrary to the State and Land

Board’s fiduciary duties as trustees, see Opinion, ¶ 3, estoppel could not be asserted

against the State in this case. The District Court further concluded that the defenses of

laches and the statute of limitations were barred for similar reasons. Because the State

claimed its efforts to seek compensation were taken in accordance with its trust duties

13

under the Montana Constitution, those efforts “stand on a different plane from an

ordinary suit to regain title or remove a cloud upon it.” Norman, 182 Mont. at 446, 597

P.2d at 719. Thus, the District Court concluded that estoppel, laches, and the statute of

limitations could not be asserted against the State.

¶20 Finally, the District Court concluded that PPL could not assert a waiver or breach

of agreement defense against the State. The District Court noted that under Montana law,

a law established for a public reason cannot be contravened by private agreement. See

Collection Bureau Servs., Inc. v. Morrow, 2004 MT 84, ¶ 9, 320 Mont. 478, 87 P.3d

1024; see also Cape-France Enters. v. Est. of Peed, 2001 MT 139, ¶¶ 33-34, 305 Mont.

513, 29 P.3d 1011. Under these principles, the State could not waive its right to rental

payments, nor could it enter into an agreement which would have the effect of prohibiting

it from carrying out its trust obligations.

¶21 Accordingly, the District Court granted the State’s motion for summary judgment,

disposing of PPL’s preemption arguments and its affirmative defenses.

Memorandum and Order of August 28, 2007, Regarding the

Navigability of the Missouri, Madison, and Clark Fork Rivers

¶22 The State’s ability to seek compensation from PPL was premised on the notion

that it owned title to the riverbeds of the Missouri, Madison and Clark Fork rivers. The

State sought a summary judgment ruling that title to these riverbeds passed to Montana

when it became a state in 1889 pursuant to the “equal footing” doctrine. In Mont.

Coalition for Steam Access, Inc. v. Curran, 210 Mont. 38, 682 P.2d 163 (1984), we

described this doctrine as follows:

14

The landmark case dealing with state and federal ownership of beds

underlying navigable waters is Martin v. Waddell (1842), 41 U.S. (16 Pet.)

367, 10 L.Ed. 997. In delivering the opinion of the Court, Mr. Chief Justice

Taney stated, “For when the Revolution took place, the people of each state

became themselves sovereign; and in that character hold the absolute right

to all their navigable waters and the soils under them for their own common

use, subject only to the rights since surrendered by the constitution to the

general government.” Waddell, supra.

. . .

States admitted to the Union subsequent to the original thirteen

succeeded to the same rights on the theory that the lands acquired by the

United States from the original thirteen colonies or from foreign

governments were held in trust for the new states in order that they might

be admitted on an equal footing with the original states. Pollard’s Lessee v.

Hagan (1845), 44 U.S. (3 How.) 212, 11 L.Ed. 565.

Curran, 210 Mont. at 44-45, 682 P.2d at 166-67.

¶23 The key inquiry in determining whether a state holds title to riverbeds under the

equal footing doctrine is whether a river was “navigable” at the time the state entered the

Union. In United States v. Utah, 283 U.S. 64, 51 S. Ct. 438 (1931), the Supreme Court

described the test for navigability in the following terms:

“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.”

15

Utah, 283 U.S. at 76, 51 S. Ct. at 441 (emphasis added) (quoting United States v. Holt

State Bank, 270 U.S. 49, 56, 46 S. Ct. 197, 199 (1926)); see also, The Daniel Ball, 77

U.S. 557 (1870); The Montello, 87 U.S. 430 (1874).

¶24 Applying these standards, the District Court granted summary judgment to the

State, holding there were no genuine issues of material fact that the Clark Fork, Missouri,

and Madison rivers were “navigable in fact” at the time of statehood, and that the State

was entitled to summary judgment on this issue as a matter of law.

¶25 With respect to the Missouri’s navigability, the State presented evidence from the

journals of Captains Meriwether Lewis and William Clark in the early 19th century

wherein they described their journey from St. Louis, Missouri, to the Pacific Coast and

their use of the Missouri River to travel through present-day Montana. The State asserted

that after the Lewis and Clark expedition, a long succession of fur trappers plied the

upper waters of the Missouri during Montana’s territorial days. Other use of the river

was made by miners and settlers from Helena, Montana, to the present-day towns of

Great Falls and Fort Benton. The State also cited to a 1986 Montana Navigable River

Study (River Study) of the Missouri River indicating commercial use of the river until the

advent of the railroad system in the 1880’s. Finally, the State referred to a 1974 study

conducted by the Army Corps of Engineers, which determined that historical evidence

supported the conclusion that the Missouri River was navigable from its headwaters near

Three Forks, Montana, to Loma, Montana.

¶26 Additionally, the State claimed that the Missouri River had been declared a

navigable river in previous administrative and judicial proceedings at both the state and

16

federal level. For instance, in a 1948 decision involving MPC, the Federal Power

Commission (the precursor to FERC), concluded that the Missouri River, throughout its

entire length, was considered a “navigable water of the United States.” See In re the

Mont. Power Co., 7 F.P.C. 163, 173, 1948 WL 964 ** 10 (1948). The Court of Appeals

for the District of Columbia subsequently affirmed this decision, holding that the 263

mile stretch of the Missouri from Fort Benton to Three Forks was a navigable water of

the United States. Mont. Power Co. v. Fed. Power Commn., 185 F.2d 491, 495 (D.C. Cir.

1950). Likewise, the State claimed that on two occasions this Court considered the

Missouri to be a navigable river. See Gibson v. Kelly, 15 Mont. 417, 39 P. 517 (1895);

Herrin v. Sutherland, 74 Mont. 587, 241 P. 328 (1925).

¶27 Turning to the navigability of the Madison, the State acknowledged that its early

navigation had not been as extensively documented as that of nearby rivers. The State

attributed this to its reputation as a forbidding region due to the alleged hostility of the

Blackfeet Tribe during the exploration and trapping decades of the early 19th century.

However, the State cited to a historical study of the Madison River which concluded that

the Madison had experienced “considerable use historically by explorers, trappers,

miners, farmers and loggers, and is generally considered to have high potential for

navigation.” Furthermore, the State relied upon the recorded observances of Captain

Clark, who navigated the nearby Jefferson River and considered the Madison to be

navigable as well based on his observations. The State also cited to documented

instances in the 20th century of log floats down the middle portion of the Madison River,

17

although the State noted that by that point in the Madison’s history, both the Hebgen and

Madison dams prevented the free and unobstructed navigation of this river.

¶28 The State pointed out that in a previous nuisance suit against MPC regarding

landholdings on the Upper Madison River which had been affected by the Madison dam,

MPC did not dispute the navigability of the Madison River in court filings. See Jeffers v.

Mont. Power Co., 68 Mont. 114, 217 P. 652 (1923). Additionally, the State cited to a

study by the Army Corps of Engineers from 1974, where the Corps concluded that in

spite of post-statehood obstructions to the Madison River, it recommended that the entire

Madison River be considered navigable from its boundary with Yellowstone Park to its

confluence with the Missouri. Finally, the State noted that the Madison is heavily used

today by commercial fishing guides and their clients, and that this use is also sufficient to

support a conclusion that the Madison River was susceptible to commercial navigation at

the time of statehood.

¶29 Turning to the Clark Fork River, the State claimed the historical record confirmed

its navigation by fur traders from Pend Oreille Lake in present-day Idaho, to the mouth of

the Thompson River above Thompson Falls, Montana, and that this same stretch of river

was used for steam navigation until the 1860’s. Based on a river study and a report by

the Corps, the State cited to historical examples of use from the Thompson Falls area to

its confluence with the Blackfoot River and beyond which supported a robust mining and

timber industry. The State also cited to federal licensing proceedings which it contended

established the navigability of the Clark Fork River. See The Montana Power Co., 8

F.P.C. 751, 1949 WL 1102 (1949); The Washington Water Power Co. (Project No. 2058),

18

10 F.P.C. 657, 1951 WL 1856 (1951); The Washington Water Power Co. (Project No.

2075), 14 F.P.C. 731, 1955 WL 3030 (1955).

¶30 PPL opposed the State’s motion, claiming there were genuine issues of fact as to

whether the Missouri, Clark Fork, and Madison Rivers were navigable at the time of

statehood in 1889. PPL presented an affidavit from Dr. David Emmons (Dr. Emmons), a

professor of history at the University of Montana. Dr. Emmons opined, based on his

review of the historical evidence, that none of the rivers were navigable at the time of

statehood. With respect to the Missouri, Dr. Emmons opined that the “Great Falls

Reach,” a stretch of river about 32 miles above Fort Benton containing a series of rapids

and falls which descend about 520 feet over 17 miles, had never been navigated. See

Mont. Power Co., 185 F.2d at 493 (describing the Great Falls Reach). Dr. Emmons

claimed to base this conclusion on historical reports as well as reports from the Army

Corps of Engineers from the 19th century, and the Lewis and Clark journals which

described efforts to portage the Great Falls Reach. Dr. Emmons also noted that studies

conducted by the Army Corps of Engineers determined that this stretch was not navigable

and could only be made so at great expense.

¶31 Regarding the Madison, Dr. Emmons pointed to a 1931 Army Corps study which

concluded that commercial navigation on this river was “entirely out of the question,”

and that as of 1931 there had never been any navigation on the Madison River. Dr.

Emmons concluded these reports and studies presented conclusive evidence of

non-navigability. Dr. Emmons discounted the observations of Lewis and Clark regarding

19

the navigability of the Madison by noting that they never actually attempted to ascend

this river.

¶32 Furthermore, PPL disputed the propriety of relying upon present-day usage of the

Madison River in order to prove navigability at the time of statehood. PPL noted that the

State relied on Alaska v. Ahtna, Inc., 891 F.2d 1401 (9th Cir. 1989), in presenting this

argument, but asserted that Ahtna was inapposite. In Ahtna, the Ninth Circuit allowed

present-day usage of the Gulkana River in Alaska to be considered in order to determine

if it was susceptible to use at the time of Alaska statehood. Ahtna, 891 F.2d at 1405.

PPL argued Ahtna was inapposite because the parties in that case had stipulated that the

characteristics of the Gulkana had not changed since statehood. Here, by contrast, PPL

presented an affidavit from Dr. Stanley Schumm, a fluvial geomorphologist, that the

characteristics of the Madison had changed since statehood, thus rendering Ahtna

inapplicable. In particular, Dr. Schumm stated that the Madison and Hebgen dams had

altered the seasonal variations in the Madison River from those which were present at the

time of statehood. The flow during the highest periods of the year (May to June) had

decreased, whereas the flow during the lowest periods of the year (October through

November) had increased. This increase was approximately two-thirds of a foot in

October, to nine-tenths of a foot in November. PPL argued that this expert analysis

established that the Madison was more susceptible now to navigation than at the time of

statehood, thus making present-day use, and reliance on the precedent established by

Ahtna, untenable. Furthermore, Dr. Schumm opined based on his expertise as a fluvial

20

geomorphologist that because of its historic, pre-statehood physical characteristics, the

Madison River was not in fact susceptible to navigation at the time of statehood.

¶33 Finally, PPL argued that there were genuine issues of material fact regarding the

navigability of the Clark Fork River at the time of statehood. Relying again on the

opinion of Dr. Emmons, PPL pointed to a 1891 Army Corps report to Congress stating

that the reach of the Clark Fork from Lake Pend Oreille to the confluence of the

Blackfoot River, roughly 6 miles upstream of Missoula, was a “torrential stream,” full of

rocks, falls, and rapids, and was “utterly unnavigable” and incapable of being made

navigable except at an enormous cost. PPL claimed that the Army Corps reiterated this

view into at least the 1940’s. Finally, PPL pointed to an unreported federal 1910 decision

from the District Court of Montana wherein the court decreed the portion of the Clark

Fork River in Sanders County, Montana, to be “a non-navigable stream incapable of

carrying the products of the country in the usual manner of water transportation . . . .”6

¶34 In addition to arguing that material facts precluded summary judgment, PPL also

asserted that the State’s evidence of historical use of these rivers was neither credible nor

appropriately used. For instance, PPL claimed that the River Study relied heavily upon

two of the most unreliable sources of historical information from the frontier West:

newspaper articles and personal reminiscences. PPL asserted, through the affidavit of Dr.

Emmons, that these sources were full of embellishments, and virtually worthless as

documentary proof of events. PPL also claimed that the State’s “Corps reports” were

6

A citation for this case, captioned Dolan v. Steele, is not available in the Pacific Reporter,

Westlaw, or Lexis. A Xeroxed copy of this decision is contained in the appendix to PPL’s briefs.

21

unreliable because they were not actually studies conducted by the Army Corps of

Engineers, but were instead studies prepared for the Army Corps by some other entity.

¶35 Lastly, PPL argued that the State’s reliance on previous federal administrative and

judicial proceedings regarding the navigability of rivers in Montana was misplaced

because those proceedings considered navigability for regulatory purposes, which is a

different standard than navigability for title purposes. In particular, PPL noted that

navigability for regulatory purposes under the FPA is established if the rivers were

navigable in the past, or if they can be made navigable with reasonable improvements.

Navigability for title, by contrast, does not allow navigability to be based on whether the

river can be improved to a state of navigability. See Or. v. Riverfront Prot. Assn., 672

F.2d 792, 794 n.1 (9th Cir. 1982) (discussing the distinctions between navigability for

title and navigability for federal regulatory purposes). For all these reasons, PPL urged

the District Court to deny the State’s motion.

¶36 In its analysis, the District Court considered the definitions of “actual use” or

“susceptible of being used” as used in the navigability for title test. Citing to Utah v.

United States, 403 U.S. 9, 91 S. Ct. 1175 (1971), the District Court observed that “actual

use” does not have to be commercially profitable under the navigability for title test. See

Utah, 403 U.S. at 11, 91 S. Ct. at 1176. Similarly, under cases such as The Montello and

Holt State Bank, the United States Supreme Court specifically noted that navigability is

not limited to large-scale commercial navigation, nor indeed does it depend on the mode

of transportation used on the river. See The Montello, 87 U.S. at 441-42; Holt State

Bank, 270 U.S. at 56, 46 S. Ct. at 199. The District Court also opined that navigability

22

could be determined under the log-floating test this Court referenced in Curran. See

Curran, 210 Mont. at 44, 682 P.2d at 166 (navigability for title can be established by

evidence of log floats).

¶37 Addressing “susceptibility” of use, the District Court cited to United States v.

Utah, 283 U.S. 64, 51 S. Ct. 438 (1931), and concluded that the key inquiry was whether

the river was susceptible to being used in its ordinary condition, “rather than the mere

manner or extent of actual use . . . .” Utah, 283 U.S. at 82, 51 S. Ct. at 443; see also The

Montello, 87 U.S. at 441-42 (stating that “[i]f it be capable in its natural state of being

used of purposes of commerce, no matter in what mode the commerce may be conducted,

it is navigable in fact, and becomes in law a public river or highway.”). Relying also on

Riverfront Prot. Assn., 672 F.2d at 795, the District Court noted that such use “need not

be without difficulty, extensive, or long and continuous.”

¶38 With these legal principles in mind, the District Court evaluated the evidence of

navigability presented by the State with respect to each river. Regarding the Missouri,

the District Court concluded the State had presented “considerable evidence” of

navigability. The District Court stated that the Federal Power Commission had

previously determined the Missouri was a navigable river in 1948, and that this decision

was subsequently affirmed by the Court of Appeals for the District of Columbia. See

Mont. Power Co., 185 F.2d at 494. The District Court discounted an argument advanced

by PPL that the “Great Falls Reach” of the Missouri prevented it from being declared a

navigable river. Citing to The Montello, 87 U.S. at 443, and Utah, 283 U.S. at 86-87, 51

S. Ct. at 445, the District Court concluded that a river is considered navigable for title

23

purposes even if it contains obstacles to free passage, such as rapids, riffles, or occasional

areas of low water requiring portage, so long as the natural navigation of the river itself

affords a channel for useful commerce.

¶39 For the Clark Fork, the District Court determined that the State had presented

historical evidence showing it was navigable in fact, including documents showing that

the river had been used for log drives. The District Court specifically cited to the

following finding of fact issued by the FPC in a federal regulatory proceeding in 1949:

The section of the Clark Fork River between Pend Oreille Lake in Idaho

and the mouth of the Jocko River in Montana was used for the

transportation of persons and property between areas now constituting the

states of Oregon, Idaho, and Montana from 1810 to 1870, such use being

canoe and batteaux transportation of furs by the fur traders of the British

Northwest Fur Co., the canoe transportation of the original missionaries to

the Indian tribes in the Clark Fork basin, and with the use of short portages

around the Cabinet Rapids and Rock Island Rapids, by steamboats of the

Oregon Steam Navigation Co. and its subsidiary, the Oregon & Montana

Navigation Co. in the carriage of substantial numbers of gold miners, their

pack animals and supplies, as well as commercial freight consigned to the

gold camps in the vicinity of what is now Helena, Mont.

The Mont. Power Co. (Project No. 1869), 8 F.P.C. 751, 753, 1949 WL 1102 ** 2.

¶40 The District Court also noted that the Clark Fork had been declared navigable

from Pend Oreille Lake to the Jocko River by the FPC in other proceedings as well. The

District Court rejected PPL’s argument that the findings of these proceedings could not

be relied upon because they involved determinations of navigability for regulatory

purposes. The District Court acknowledged differences between the navigability for title

and regulatory purposes test, but observed it was not prohibited from relying on the

findings generated by regulatory decisions in evaluating whether a Montana river

24

satisfied the navigability for title test. The District Court noted that obstructions

requiring portages do not defeat a finding of navigability for title where the river provides

a useful channel for commerce. See The Montello, 87 U.S. at 441-42; Utah, 283 U.S. at

86-87, 51 S. Ct. at 445. Here, the findings of the FPC and the other evidence presented

by the State showed that the Clark Fork was used as a channel for commerce and met the

navigability for title test.

¶41 Turning to the Madison River, the District Court acknowledged there was “little

historical documentation” regarding use of this river. However, the 1986 River Study

prepared for DNRC did conclude that the Madison River had experienced considerable

use by explorers, trappers, miners, farmers, and loggers. The River Study also

determined that the Madison had a “high potential for navigation.” Furthermore, the

River Study referred to at least one recorded example of a log float in 1913 on the middle

portion of the Madison, from the mouth of its west fork to present-day Varney, Montana.

Additionally, the District Court pointed out that the Madison today experiences

“considerable recreational use.” Despite the admittedly “sparse” record before it, the

District Court concluded that the Madison was a navigable river.

¶42 Finally, with respect to each of these determinations, the District Court relied to

some extent on the fact that PPL had admitted the navigability of these rivers in its

answer to the State’s counterclaims. The District Court concluded that PPL was bound

by these admissions, and relied upon this point to help bolster its conclusions. Because

the District Court explicitly relied upon PPL’s admissions in coming to a decision, we

must conclude they carried some weight in its final determination.

25

¶43 We take note of this aspect of the District Court’s reasoning because prior to both

the issuance of the scheduling order and the District Court’s grant of summary judgment

on the navigability issues, PPL filed a motion to amend its pleadings to remove any

admissions regarding the navigability of the Clark Fork, Madison, and Missouri Rivers.

In its brief in support, PPL claimed that its historical research had yielded documents

which raised questions about the navigable status of the rivers on which its projects are

located. In light of the State’s responses to discovery requests and its research, PPL

sought to amend its answer to account for this newly discovered information. However,

PPL’s motion was never properly addressed by the District Court. PPL raises this issue

as an error requiring reversal, and we will return to this topic in our analysis of the

District Court’s decision.

Memorandum and Order of August 28, 2007, Regarding Whether the Streambeds

of the Missouri, Madison, and Clark Fork Rivers are School Trust Lands

¶44 The State sought summary judgment that Montana’s navigable streambeds were

part of the school trust lands pursuant to Article X, Section 2 of the 1972 Montana

Constitution. This provision was carried forth from Article XI, Section 2, of the 1889

Montana Constitution and reads in pertinent part as follows:

The public school fund of the state shall consist of:

(1) Proceeds from the school lands which have been or may

hereafter be granted by the United States . . .

(4) All other grants of land or money made from the United States

for general educational purposes or without special purpose . . . .

¶45 The State argued that the streambeds were school trust lands subject to fiduciary

status under the Montana Constitution, and to the provisions of the HRA. The State

26

asserted that PPL was obligated to present to the Land Board a written application to

lease or license a power site under the HRA, and that because it had failed to do so it

should be held liable for all rents due under the HRA, and all other damages caused by its

unlawful occupancy of state lands.

¶46 PPL argued that the riverbeds were not school trust lands, but instead were public

trust lands held generally in trust for the benefit and use of all Montanans under the

public trust doctrine. See Curran, 210 Mont. at 47-48, 682 P.2d at 168 (discussing the

public trust doctrine and noting this doctrine “provides that states hold title to navigable

waterways in trust for the public benefit and use . . . .”). This distinction was significant

for PPL because if the riverbeds were public trust lands, it could possibly have the right

to use them without paying the State compensation on the grounds that its use of water

was a beneficial public use. By contrast, if the riverbeds were found to be school trust

lands, the Land Board would be constitutionally required to charge PPL full market value

for their use regardless of its character. See Montrust, ¶¶ 13-14.

¶47 In its August 28, 2007 memorandum and order, the District Court agreed with the

State and concluded that the state-owned riverbeds were school trust lands. The District

Court began its analysis with reference to the equal footing doctrine, noting that prior to

Montana’s admittance into the Union the United States held the riverbeds in trust for the

future states. See Pollard’s Lessee v. Hagan, 44 U.S. 212 (1845). The District Court

noted that most courts have described state lands as “vesting” with a state upon its

entrance to the Union. See e.g. Arizona v. Cal., 373 U.S. 546, 597, 83 S. Ct. 1468, 1496

(1963), overruled on other grounds by Cal. v. United States, 438 U.S. 645, 98 S. Ct. 2985

27

(1978); Or. v. Corvallis Sand and Gravel Co., 429 U.S. 363, 371, 97 S. Ct. 582, 587

(1977).

¶48 Once lands pass to the state under the equal footing doctrine, they are governed by

state law. See Mont., 450 U.S. at 551, 101 S. Ct. at 1251. Thus, it was important for the

District Court to determine how lands received by Montana under the equal footing

doctrine would be classified under the Montana Constitution. To make this

determination, the District Court analyzed the plain meaning of the term “grant” as

follows:

The term “grant” is both a verb and a noun, and it has a number of

meanings, depending on how it is used. When used as a verb, BLACK’S

LAW DICTIONARY, defines “grant” as “1. To give or confer (something),

with or without compensation. 2. To formally transfer (real property) by

deed or other writing. 3. To permit or agree to. 4. To approve, warrant, or

order.” When used as a noun, “grant” means “1. An agreement that creates

a right of any description other than the one held by the grantor. 2. The

formal transfer of real property. 3. The document by which a transfer is

effected. 4. The property or property right so transferred.” BLACK’S

LAW DICTIONARY (8th ed., 1999).

¶49 The District Court then considered how the term “grant” was used in each of the

relevant provisions of the Montana Constitution. First, the District Court stated that

under Article X, Section 2(1), school trust lands are those lands transferred to Montana

by the grant of land from Congress under the 1889 Enabling Act. The equal footing

lands did not fall into this category. Similarly, the District Court concluded that the term

“grants” in Article X, Section 2(4) is used as a noun and refers to the transfer of title to

lands owned by the United States. Thus, the equal footing lands did not technically fall

into this class, since they were not “owned” by the United States prior to Montana’s

28

admission as a state, but instead held in trust for Montana until such time as it became a

state. Additionally, the District Court turned to Article X, Section 11(1), which relates to

the public trust lands and reads as follows:

Section 11. Public land trust, disposition. (1) All lands of the state

that have been or may be granted by congress, or acquired by gift or grant

or devise from any person or corporation, shall be public lands of the state.

They shall be held in trust for the people, to be disposed of as hereafter

provided, for the respective purposes for which they have been or may be

granted, donated or devised.

¶50 The District Court interpreted the term “granted” as used in this section to refer to

all the lands transferred to Montana through an action of Congress. While recognizing

that the underlying legal basis for Montana’s acquisition of the riverbeds was the equal

footing doctrine, the District Court noted that the equal footing doctrine itself was not

triggered until passage of the Enabling Act. Because this act was passed by the United

States Congress, the District Court concluded that the riverbeds at issue were governed

by Article X, Section 11(1), and were public trust lands of the State. As a result, the

District Court reasoned, the Land Board had the authority to classify the lands as school

trust lands, and had the authority to lease the riverbeds and use the funds for the support

of public education.

¶51 Finally, at the conclusion of this order, the District Court noted that PPL had

moved for summary judgment on the issue that any flooded lands resulting from its

operations were not a part of the school trust lands. Without further addressing the merits

of this argument, the District Court concluded that there remained genuine issues of

material fact on this issue which precluded summary judgment.

29

¶52 In sum, the District Court concluded that the streambeds of the Missouri, Madison,

and Clark Fork Rivers are school trust lands, granting summary judgment to the State.

The District Court further denied PPL’s motion for summary judgment that any flooded

lands are not school trust lands.

September 6, 2007 Memorandum and Order Regarding PPL’s Motion

for Partial Summary Judgment on the Application of the HRA

¶53 On October 6, 2006, PPL moved for summary judgment, arguing against

application of the HRA. PPL advanced three reasons why it was entitled to summary

judgment. First, PPL argued the HRA does not explicitly state that it applies to the

streambeds of navigable rivers, and it therefore could not be applied to PPL’s dams.

Second, PPL noted that the District Court had already concluded that § 77-4-203, MCA,

was federally preempted; this being so, PPL claimed that the remaining, non-preempted

parts of the HRA could not be severed without invalidating the entire act. Third, PPL

argued that the HRA could not be applied retroactively to those PPL facilities which were

built prior to its passage in 1931.

¶54 The District Court denied PPL’s motion. Addressing PPL’s first argument, the

District Court relied upon § 77-1-101, MCA (2005), which reads in pertinent part as

follows:

77-1-101. Definitions. Unless the context requires otherwise and

except for the definition of state land in 77-1-701, in this title, the following

definitions apply . . .

(6)(a) “State land” or “lands” means:

(i) lands granted to the state by the United States for any purpose,

either directly or through exchange for other lands;

(ii) lands deeded or devised to the state from any person; and

30

(iii) lands that are the property of the state through the operation of

law.

¶55 The HRA is contained in Title 77, and therefore is governed by this statute.

Because the District Court had previously concluded that the riverbeds were “granted” to

Montana by the United States, it concluded that the riverbeds were state lands under

§ 77-1-101(6)(a), MCA (2005), and that the HRA applied. The District Court also noted

that the definition of “power sites” in the HRA contained a specific definition which

contemplated that the streambeds are state lands. See Opinion, ¶ 5. Thus, the District

Court concluded that the HRA applied to the streambeds at issue in this case.

¶56 Turning to PPL’s second argument, the District Court simply referred back to its

order of April 14, 2006, wherein it held that federal law did not preempt the State from

seeking compensation from PPL under the HRA. The District Court did not conduct any

additional analysis in rejecting this argument.

¶57 Finally, the District Court addressed PPL’s argument that the HRA could not be

applied to dams built before the act’s passage in 1931. PPL claimed the application of

the HRA in this manner would impose upon it a new licensing process, require bidding

for a proposed license or lease, and impose undefined financial obligations on its

hydroelectric projects, thus impairing its vested rights. The District Court disagreed. The

District Court noted that Article XVIII, Sections 1 and 3, of the 1889 Montana

Constitution predated the construction of any of PPL’s dams and specifically contained

the trust provisions carried forward to the 1972 Montana Constitution. See Montrust,

¶ 13. The existence of this constitutional obligation since 1889 prevented the state from

31

selling or conveying interests in public state lands without obtaining full market value for

them. Because the 1889 Constitution established the State’s interest in the riverbeds of

the Missouri, Clark Fork, and Madison Rivers, PPL never in fact held any interests in

those streambeds. In this connection, the HRA merely provided a statutory basis for the

Land Board to exercise those obligations originally set forth in the 1889 constitution.

“As a result,” the District Court concluded, “the [HRA] is not being applied retroactively;

rather the State, as trustee of public lands, is complying with its constitutional mandate.”

¶58 Accordingly, the District Court denied PPL’s motion for summary judgment

seeking to preclude application of the HRA as a basis for the State to seek compensation

in this case.

September 12, 2007 Memorandum and Order Regarding PPL’s Motion for Partial

Summary Judgment That the Right to Appropriate Water for Beneficial Use

of Hydropower Includes the Incidental Right to Use State Land

¶59 On October 6, 2006, PPL also moved for summary judgment on its claim that the

right to appropriate water for beneficial use, as recognized and confirmed in both the

1889 and 1972 Montana Constitutions, includes the incidental right to use state land.

PPL claimed that this right is not contingent upon the payment of rent for its alleged

occupation of state land in conjunction with its dams. PPL argued that its rights of

appropriation were analogous to those of irrigators, stockmen, miners, and municipalities,

and that its dams were no different than ditches, ponds, flumes, or intake pipes used to

divert and appropriate water for other forms of beneficial use. PPL argued that under

Article IX, Section 3 of the 1972 Montana Constitution, the people of Montana have

defined water rights in a manner that includes the incidental use of beds and banks for the

32

apparatus of hydropower use and, as a result, the State was barred from seeking

compensation for the use of beds and banks for those hydropower projects.

¶60 The District Court denied PPL’s motion for summary judgment on this issue.

Citing to Article IX, Section 3(2) of the Montana Constitution, the District Court

acknowledged that hydroelectric generation is a beneficial use under Montana law. This

provision reads as follows:

The use of all water that is now or may hereafter be appropriated for sale,

rent, distribution, or other beneficial use, the right of way over the lands of

others for all ditches, drains, flumes, canals, and aqueducts necessarily used

in connection therewith, and the sites for reservoirs necessary for collecting

and storing water shall be held to be a public use.

¶61 While hydropower may be a beneficial use of water, the District Court

nevertheless concluded that nothing in the Montana Constitution or state law expressly

allows a party to use state lands while appropriating water for beneficial use without

paying compensation to the State for the occupancy and use of those lands. Furthermore,

the District Court noted that it had already concluded that the State held title to the

riverbeds, and held those lands in trust for the people of Montana. As a result, the State

is under a constitutional obligation to protect those lands, and is specifically prohibited

from alienating or disposing of them without obtaining compensation. For these reasons,

the District Court denied PPL’s motion for summary judgment on this issue.

September 13, 2007 Memorandum and Order Regarding the Parties’ Motions to Strike

¶62 On October 6, 2006, PPL moved to strike the affidavits submitted by the State in

support of its motion for summary judgment regarding the navigability of the Missouri,

Clark Fork, and Madison Rivers. In support of its summary judgment motion, the State

33

had submitted affidavits from Monte Mason (Mason), an employee for the DNRC, and

State Archivist Jodie Foley (Foley). In his affidavit, Mason rendered his opinion that the

Clark Fork, Missouri, and Madison Rivers were navigable at the time of statehood. He

based these conclusions on a number of reports and studies attached as exhibits. PPL

claimed that in his deposition, Mason admitted he had no personal knowledge of these

studies or their preparation. PPL claimed that because Mason lacked personal knowledge

of the contents, accuracy, or reliability of the exhibits, they should be stricken from

consideration for purposes of summary judgment. Additionally, PPL argued the State

failed to show that any of the documents or exhibits upon which Mason relied fell into

recognized exceptions to the hearsay rule. For instance, one attached exhibit was the

River Study prepared by the Heritage Research Center of Missoula in December 1986.

Because Mason had no personal knowledge of how it was prepared, and it was less than

20 years old at the time its admittance was sought in May 2006, it could not be admitted

under the Montana Rules of Evidence as an ancient document or through Mason. See

M. R. Evid. 901(8).

¶63 PPL presented a similar argument with respect to another attached exhibit, an

undated report on the navigability of the Clark Fork River prepared for the Army Corps

of Engineers. Mason could not personally attest to its contents, and could not

demonstrate that it was more than 20 years old. Two other exhibits challenged by PPL

were navigability reports on the Madison and Missouri Rivers completed by the Army

Corps of Engineers in 1974. While these two reports did appear to meet the prima facie

test of being at least 20 years old, PPL argued their admission was barred because they

34

were based on the accounts of others in old newspapers, old books and similar

publications regarding matters that reportedly occurred in the late 1800’s or early 1900’s.

Because the State could not establish any first-hand knowledge of these events by authors

of these reports, PPL argued they were inadmissible hearsay whose defects could not be

cured by admission under the ancient document exception.

¶64 PPL asserted that 38 documents attached to Foley’s affidavit were inadmissible

hearsay for largely the same reasons. PPL noted that the majority of these documents

were “excerpts from books or magazine articles written by authors, typically years after

the recounted events, and do not provide a basis for any personal knowledge of the

matters discussed.” PPL argued that all historical evidence, except for sources based on

direct, first-hand accounts like the Lewis and Clark Journals, were inadmissible and

should be stricken from consideration.

¶65 Again, the District Court denied PPL’s motion. First, it considered the affidavit of

Mason and accompanying exhibits. The District Court observed that Mason averred in

his affidavit that DNRC has conducted numerous studies to determine and document the

ownership of state lands, and that it had in fact commissioned the 1986 River Study.

Mason averred that the River Study compiled historical evidence for over 43 different

rivers in Montana in order to assist DNRC in determining state ownership of streambeds

for leases of trust land. Mason also averred that he relied on the reports prepared by the

Army Corps in making determinations regarding the navigability of the rivers at issue.

Based on an analysis of the affidavit, the District Court concluded that Mason regularly

relies upon the River Study and Army Corps reports in carrying out his official duties,

35

and that these documents were relevant to the issues at hand. The District Court

concluded that the attachments to Mason’s exhibits would likely be admissible at trial.

Although the District Court acknowledged the documents were hearsay, it nonetheless

concluded that the State would likely be able to lay a foundation for the admission of

these exhibits if required to do so.

¶66 Employing a similar rationale, the District Court held that the Foley affidavit and

accompanying exhibits could be considered on summary judgment as well. The District

Court noted that Foley’s affidavit simply authenticates the documents listed and attached

to her affidavit in accordance with her duties as a state archivist. Although the

documents themselves are hearsay, the District Court determined Foley would likely be

able to lay a foundation for the admissibility of these documents at trial. For these

reasons, the District Court denied PPL’s motion to strike.

¶67 Upon the resolution of these motions and the District Court’s determination that

the State was entitled to seek compensation from PPL for its use of the state-owned

riverbeds and streams “occupied” by its dams, the stage was set for a bench trial on the

State’s counterclaims for compensation. A seven-day bench trial was held from October

22 to 30, 2007, and the District Court received expert testimony and argument from both

parties. The primary issues were the amount of compensation the State was entitled to

recover from PPL for its use of the riverbeds, and whether the HRA is preempted on an

“as applied” basis by the FPA. The District Court was tasked with considering the

methodology which should be used to calculate damages, whether the State was entitled

36

to prejudgment interest, and whether the Land Board or the District Court should

determine full market value for PPL’s use of state-owned land.

¶68 On June 13, 2008, the District Court entered a Memorandum of Decision

(Memorandum) and a final order containing findings of fact and conclusions of law

(Final Order). In its Memorandum the District Court first addressed PPL’s “as applied”

federal preemption challenge to the operation of the HRA. PPL maintained that the

HRA, as applied, was preempted by the FPA because it was impossible for PPL to

comply with the mandates of both statutes. PPL noted that § 77-4-209, MCA, of the

HRA permits the Land Board to enter into a lease for a term of no greater than 50 years.

However, under the FPA’s implementing regulations FERC requires a licensee to

“acquire title in fee or the right to use in perpetuity all lands, other than lands of the

United States” within 5 years of the issuance of a license for a hydroelectric facility under

Article 5 of a standard FERC license. See Standardized Conditions for Inclusion in

Preliminary Permits and Licenses Issued Under Part I of the Federal Power Act, 54

F.P.C. 1792, 1834, 1975 WL 14631 **36 (1975) (emphasis added) (discussing Article 5

of Form L-5). PPL claimed that the 50-year limitation on state leases frustrated the

objective of the FPA. Furthermore, PPL argued that the leasing process described in the

HRA, see §§ 7-4-204 to 207, MCA, also contravened the regulatory purpose of the FPA

as well as its FERC licenses.

¶69 The District Court determined that the FPA did not preempt the HRA under an “as

applied” challenge. The District Court observed that the State’s obligation to seek

compensation stemmed from its fiduciary duties to administer public trust lands under

37

Article X, Section 11, of the Montana Constitution. Referring to First Iowa, the District

Court noted that the United States Supreme Court had previously concluded that the FPA

does not preempt property rights pursuant to state law, and allows states to seek

compensation for the use of state lands by FERC-licensed facilities. Secondly, the

District Court determined that FERC had the ability to alter the “in perpetuity” clause in

PPL’s license, noting that 18 C.F.R. § 2.9(a) (2010), states that “[t]he Commission has

approved several sets of standard conditions for normal inclusion in preliminary permits

or licenses for hydroelectric developments. In a special situation, of course, the

Commission in issuing a permit or license for a project will modify or eliminate a

particular article (condition).” Indeed, the District Court observed that FERC permitted

just such a modification in Cooper Valley Electric Assn., Inc., 4 F.E.R.C. ¶ 61336, 1978

WL 15902 (1978), and allowed a FERC licensee to hold an interest in land which would

be a part of its hydroelectric facility without the requirement that it be “in perpetuity.”

See Cooper Valley, 4 F.E.R.C. ¶ 61336 at ¶ 61796, 1978 WL 15902 **1. Thus, the

District Court concluded that the Land Board had the authority to enter into a lease under

the HRA, provided that such a lease would comply with FERC regulations.

¶70 The District Court then considered whether the State could seek rent for affected

acreage lying both above and below PPL’s dams, or, as argued by PPL, it could seek rent

based solely on affected acreage above PPL’s dams. To resolve this question, the District

Court turned to § 77-4-202, MCA, of the HRA, which defines the term “power site.” The

District Court concluded that the statute was clear on its face, and it was not necessary to

resort to the rules of construction in order to determine if PPL could be assessed for

38

acreage below its dams. The District Court noted again that the State’s claim for

compensation was based on Article X, Section 11, of the Montana Constitution, in its role

as the trustee of state lands. Because the riverbeds below and above PPL’s dams were

state-owned lands and fell within the HRA’s definition of a “power site,” the State was

required to obtain full market value for the use of those lands under Montrust.

¶71 The District Court also considered the State’s claims for prejudgment interest

pursuant to § 27-1-211, MCA. It rejected this claim under the criteria set forth in Ramsey

v. Yellowstone Neurosurgical Assocs., 2005 MT 317, ¶ 19, 329 Mont. 489, 125 P.3d

1091, because the amount of compensation was not certain or capable of being made

certain when PPL purchased the Thompson Falls and Missouri-Madison Projects.

Furthermore, neither DNRC nor the Land Board had adopted a rule as to how to set rent

for the use of a “power site” under the HRA, requiring a trial in order to determine the

appropriate methodology for this assessment.

¶72 Next, the District Court addressed the question of what methodology should be

used in order to assess the amount of compensation due to the State. This issue was the

focus of much of the trial. PPL argued that the State was entitled to recover only the

value of the estate or interest conveyed by its dams (i.e., an easement for the footprints

created by the dam), and that any damages based on its occupation of state-owned

riverbeds would be limited to the value of the “flowage easement” from its use. The

State, by contrast, argued for a damage assessment based on what it termed the “shared

net benefits” methodology.

39

¶73 Under this methodology, net benefits of a project would be determined by

calculating the difference between the value of the power produced and the cost of

producing that power. The net benefits (i.e., the profits), would then be distributed 50-50

between the project owner and the land owners. In the Memorandum, the District Court

noted that § 77-4-208, MCA, of the HRA required the Land Board to obtain full market

value for PPL’s use of power sites, as “carefully ascertained from all available sources.”

The District Court observed that riverbeds have unique characteristics which make them

valuable for the production of hydropower, and concluded that the “shared net benefits”

methodology as presented by the State would best take into consideration the economic

contributions the state lands make to hydropower projects. In this connection, the

District Court stated that the Supreme Court of Maine had concluded this methodology

was appropriate to apply to the assessment of rents for a hydroelectric facility in State v.

Cent. Me. Power Co., 640 A.2d 1067 (Me. 1994), and that it had been applied by FERC

to assess hydroelectric facilities in previous regulatory proceedings involving tribal lands.

¶74 Lastly, the District Court considered whether it or the Land Board should decide

the fair market value of the riverbeds. PPL had argued that under the HRA, the Land

Board, and not the District Court, was the proper authority to decide the fair market value

rental or lease rate for PPL’s use of the power sites. The District Court rejected this

argument, and held that it could determine the fair market value for PPL’s past use of the

state-owned lands. First, the District Court noted that PPL had not raised this issue in the

pretrial order. Second, it distinguished Montanans for the Responsible Use of the Sch.

Trust v. Darkenwald, 2005 MT 190, 328 Mont. 105, 119 P.3d 27, noting that the case sub

40

judice did not involve a challenge to actions taken by the Land Board. See Darkenwald,

¶ 6 (noting that the appeal in that case was a direct challenge to the actions of the Land

Board). Finally, the District Court held that it would not rule on the terms of a lease

between PPL and the Land Board extending into the future, as that matter would be

properly left to the discretion of the Land Board.

¶75 In its Final Order, the District Court applied the rationale set forth in the

Memorandum to the argument and evidence presented by the parties at trial. The District

Court noted its previous rulings discussed above, and concluded it would apply the

State’s “shared net benefits” method to assess damages. The District Court relied

principally upon the State’s expert economist, John Duffield, Ph.D. (Dr. Duffield), in

order to arrive at damages for PPL’s use of the state-owned power sites from 2000 to

2007. The District Court rejected the valuation offered by PPL’s expert, Gary Saleba

(Saleba), who based his rental assessment on the methodology used by FERC to

determine the amounts PPL should pay for using federal lands at its Montana facilities,

pursuant to 18 C.F.R. § 11.2 (2010).7 The District Court noted that Saleba’s

methodology did not employ the “shared net benefits” methodology, did not include

7

“Reasonable annual charges for recompensing the United States for the use, occupancy, and

enjoyment of its lands (other than lands adjoining or pertaining to Government dams or other

structures owned by the United States Government) or its other property, will be fixed by the

Commission [i.e., FERC]. In fixing such charges the Commission may take into consideration

such factors as commercial value, the most profitable use for which the lands or other property

may be suited, the beneficial purpose for which said lands or other property have been or may be

used, and such other factors as the Commission may deem pertinent.” 18 C.F.R. § 11.2(a)

(2010).

41

below the dam acreage, and arrived at a much lower figure than that calculated by Dr.

Duffield.

¶76 To arrive at his calculations, Dr. Duffield utilized documents either produced or

publicly filed by PPL to conclude that PPL owed the State past rents, excluding interest,

from 2000 to 2006 in the amount of $8,988,436 for Thompson Falls Project. The 2007

rent for this project was $1,950,592. This figure was based on the calculation that the

State owned 54.6 % of the power site, and that the State was entitled to a 27.3% share, or

half, of the net benefits of the project. For the Madison-Missouri Project, Dr. Duffield

concluded that PPL owed the State past rent, excluding interest, of $25,759,825 for 2000

through 2006. The 2007 rent due for the Madison-Missouri Project was $4,257,327. The

percentage shares of state ownership of the lands constituting each separate hydroelectric

facility are as follows: Hebgen, 5.7%; Madison, 6.8%; Hauser, 17.6%; Holter, 26.2%;

Black Eagle, 96.2%; Rainbow, 63.6%; Cochrane, 79.3%; Ryan, 39.7%; and Morony,

62.9%. With the Hebgen Dam’s benefits allocated to downstream facilities, 8 the State’s

share of the net benefits of each of these facilities is as follows: Madison, 3.3%; Hauser,

8.6%; Holter, 12.8%; Black Eagle, 46.9%; Rainbow, 31.0%; Cochrane, 38.8%; Ryan,

19.4%; and Morony, 30.8%.

¶77 Judgment in the amount of $40,956,180 was entered against PPL on August 18,

2008. PPL now appeals from this judgment, as well as the rulings discussed above. We

state the issues as follows:

8

Because the Hebgen Dam was a storage facility which does not itself produce power, Dr.

Duffield allocated its benefits to facilities which were downstream of its location.

42

¶78 Issue One: Did the District Court err in granting summary judgment regarding

the navigability of the Clark Fork, Missouri, and Madison Rivers at the time Montana

became a state in 1889?

¶79 Issue Two: Did the District Court err in granting summary judgment to the State

on the issue of whether Montana’s navigable riverbeds are school trust lands?

¶80 Issue Three: Did the District Court err in granting summary judgment on

whether the right to appropriate water for beneficial use of hydropower includes the

incidental right to use state land?

¶81 Issue Four: Did the District Court err in granting summary judgment regarding

the availability of PPL’s affirmative defenses against the State’s claims?

¶82 Issue Five: Did the District Court err in concluding that the HRA applied to the

Thompson Falls and Missouri-Madison Projects?

¶83 Issue Six: Did the District Court err in its calculation of damages?

STANDARD OF REVIEW

¶84 We review de novo a district court’s grant of summary judgment, employing the

same standards utilized by the district court pursuant to M. R. Civ. P. 56. Smith v.

Burlington Northern and Santa Fe Ry. Co., 2008 MT 225, ¶ 10, 344 Mont. 278, 187 P.3d

639. The moving party must establish the absence of genuine issues of material fact and

entitlement to judgment as a matter of law. Smith, ¶ 10. Once this burden has been

satisfied, the non-moving party must present substantial evidence essential to one or more

elements of the case to raise a genuine issue of material fact. Smith, ¶ 10. Reliance upon

“conclusory statements” lacking specific factual support is not sufficient to raise a

43

genuine issue of material fact. Smith, ¶ 10; see also Tin Cup Co. Water and/or Sewer

Dist. v. Garden City Plumbing & Heating, Inc., 2008 MT 434, ¶ 54, 347 Mont. 468, 200

P.3d 60 (“[C]onclusory statements and assertions do not constitute facts that are ‘material

and of a substantial nature’ that would prevent summary judgment.”).

¶85 Because we review a grant of summary judgment de novo, we need not defer to

the judgments and decisions of the district court. See Lorang v. Fortis Ins. Co., 2008 MT

252, ¶ 53, 345 Mont. 12, 192 P.3d 186. This rationale applies to evidentiary rulings in

the summary judgment context. We review evidentiary rulings going directly towards

the propriety of summary judgment de novo, in order to determine whether the

evidentiary requirements for summary judgment have been satisfied. See Smith,

¶¶ 41-42.

¶86 Outside of the summary judgment context, we review a district court’s conclusions

of law for correctness and its findings of fact under the clearly erroneous standard. Roe

Family, L.L.C. v. Lincoln Co. Bd. of Commrs., 2008 MT 70, ¶ 12, 342 Mont. 108, 179

P.3d 514.

DISCUSSION

¶87 Issue One: Did the District Court err in granting summary judgment regarding

the navigability of the Clark Fork, Missouri, and Madison Rivers at the time

Montana became a state in 1889?

¶88 Analysis of this issue involves the consideration of three key questions. The first

is whether the District Court erred in relying upon the Mason and Foley affidavits and

attached exhibits for purposes of summary judgment. The second is whether the District

Court correctly interpreted and applied the navigability for title test in granting the State’s

44

motion for summary judgment. The third is whether there exist genuine issues of

material fact which preclude summary judgment.

A. The District Court’s Reliance Upon the Mason and Foley Affidavits and

Accompanying Exhibits

¶89 PPL filed a motion to strike the affidavits of Mason and Foley, as well as the

exhibits attached thereto. See Opinion, ¶¶ 62-64. PPL argued these affidavits were based

on inadmissible hearsay and should not be considered in the summary judgment context.

The District Court denied the motion. While the District Court agreed that the supporting

exhibits contained hearsay, it reasoned that they would nonetheless likely be admissible

at trial. See Opinion, ¶¶ 65-66.

¶90 PPL argues the District Court erred in considering the Mason and Foley affidavits

and attached exhibits. PPL claims the District Court permitted the State to rely entirely

on inadmissible hearsay in order to carry its burden of proof on summary judgment. PPL

contends that Mason conceded in deposition testimony that his entire testimony regarding

navigability was based upon the reports attached in his affidavit, yet he was not familiar

with the preparation of the reports and could not personally testify to their accuracy,

reliability, or the methods used to generate them. PPL claims the same is true with

respect to the Foley affidavit and exhibits. PPL also claims that its expert Dr. Emmons

directly opined that the State’s evidence on summary judgment lacked credibility to

prove anything about the historical use of the rivers and was instead based on dubious

historical sources. Under these circumstances, PPL argues the State’s evidence should

not have been considered on summary judgment.

45

¶91 In response, the State first asserts that courts applying the navigability for title test

routinely rely on historical evidence. Second, while it admits the historical record in this

case is hearsay because there is no one alive today who personally witnessed the

condition of Montana’s rivers in 1889, the State argues that such evidence is not excluded

by the hearsay rule itself. The State contends that the evidence in this case is admissible

under several hearsay exceptions contained in M. R. Evid. 802 and 803. The State

further posits that because the subject matter of this issue is beyond the recall of living

witnesses, the District Court properly allowed the admission of this type of hearsay

evidence.

¶92 M. R. Civ. P. 56(e) states that supporting and opposing affidavits in the summary

judgment context “shall be made on personal knowledge, [and] shall set forth facts as

would be admissible in evidence . . . .” In Smith, we stated that affidavits made without

personal knowledge and based on hearsay should not be considered on summary

judgment. Smith, ¶ 39. However, we also stated that exhibits may be submitted in

support of a summary judgment affidavit so long as a proper foundation can be laid for

such exhibits based on any exception to the rule excluding hearsay evidence. Smith, ¶ 39.

While unauthenticated documents should not be considered on summary judgment, a

document can be considered if it is “ ‘authenticated by and attached to an affidavit that

meets the requirements of [Rule] 56(e) and the affiant [is] a person through whom the

exhibits could be admitted into evidence.’ ” Smith, ¶ 47 (quoting Hal Roach Studios, Inc.

v. Richard Feiner and Co., Inc., 896 F.2d 1542, 1550-51 (9th Cir. 1990)). Furthermore,

46

self-authenticated documents can be considered on summary judgment pursuant to

M. R. Evid. 902. Smith, ¶ 49.

¶93 Foley is the State Archivist of the Montana Historical Society. In her affidavit,

Foley attached a number of historical works and periodicals, and swore under oath that

they were true copies of the publications and documents from the collection of the

Montana Historical Society. M. R. Evid. 902 contains ten categories of documents for

which “[e]xtrinsic evidence of authenticity as a condition precedent to admissibility is not

required . . . .” M. R. Evid. 902(4), (5),(6), and (8) read as follows:

(4) Certified copies of public records. A copy of an official record

or report or entry therein, or of a document authorized by law to be

recorded or filed and actually recorded or filed in a public office, including

data compilations in any form, certified as correct by the custodian or other

person authorized to make the certification, by certificate complying with

paragraph (1), (2), or (3) or complying with any law of the United States or

of this state.

(5) Official publications. Books, pamphlets, or other publications

purporting to be issued by public authority.

(6) Newspapers and periodicals. Printed materials purporting to be

newspapers or periodicals.

. . .

(8) Acknowledged documents. Documents accompanied by a

certificate of acknowledgement executed in the manner provided by law by

a notary public or other officer authorized by law to take

acknowledgements.

¶94 All of the documents listed in the Foley affidavit fall into one or more of these

categories, and would be admissible as self-authenticating documents under M. R. Evid.

902. Furthermore, many of the documents submitted with the Foley affidavit would be

47

admissible under M. R. Evid. 901(8), which provides for the admission of documents

which meet the following requirements:

Ancient documents or data compilation. Evidence that a document or data

compilation, in any form, (A) is in such condition as to create no suspicion

concerning its authenticity, (B) was in a place where it, if authentic, would

likely be, and (C) has been in existence 20 years or more at the time it is

offered.

Additionally, Foley, as the State Archivist, would be able to lay a foundation for these

exhibits if required to do so under M. R. Evid. 803(8), the “public records and reports”

exception to the hearsay rule. See Mont. Petroleum Tank Release Compensation Bd. v.

Crumleys Inc., 2008 MT 2, ¶¶ 79-81, 341 Mont. 33, 174 P.3d 948 (discussing the

application of M. R. Evid. 803(8)). The Foley exhibits are clearly admissible under a

hearsay exception and the District Court did not err in considering them for purposes of

summary judgment.

¶95 Mason is the Minerals Management Bureau Chief for DNRC. He states in his

affidavit that he is in charge of leasing the minerals in and under the streambeds of

navigable rivers in Montana. In order to discharge these official duties, DNRC has

conducted numerous streambed studies to determine and document the state ownership of

land in Montana. In 1986, DNRC commissioned the River Study, a historical study of

the navigable rivers in Montana. Mason swore that a true copy of this study was attached

to his affidavit. The River Study is clearly admissible under M. R. Evid. 803(8) or

902(4). The Mason affidavit references three other documents as well: (1) an Army

Corps report on the navigability of the Clark Fork River prepared in or around 1975; (2)

an Army Corps navigation study of the Madison River completed in 1974; and (3)

48

another Army Corps study of the Missouri completed in 1974. Mason avers that true

copies of each of these documents are attached to his affidavit. Mason’s affidavit

established that these studies and reports were pulled from the records kept by the DNRC

used in pursuance of its official duties. These records are undoubtedly admissible under

M. R. Evid. 803(8). Mont. Petroleum, ¶ 80 (holding that data pulled from records

regularly kept by the Montana Department of Environmental Quality was admissible

under the public records exception to the hearsay rule). The Mason affidavit and exhibits

were admissible and properly considered by the District Court.

¶96 Furthermore, we agree with the State that reliance upon historical works, including

newspaper accounts, is well-accepted and proper when applying the navigability for title

test. Courts applying this test are often required to arrive at factual determinations

regarding matters outside the recall of any living witnesses, thus requiring a higher

degree of reliance upon historical material than in the run of the mill civil dispute. See

Montana Power, 1 8 5 F . 2 d a t 4 9 8 (“[I]t is settled that historical works generally

considered authentic are admissible in evidence, especially in cases such as this one

which must delve into the relatively ancient and obscure origins of commerce on the

nation’s rivers.”); Conn. Light & Power Co. v. Federal Power Commn., 557 F.2d 349,

354-56 (2d. Cir. 1977).

B. The District Court’s Interpretation and Application of the Navigability for Title

Test

¶97 The evidence before the District Court having been properly considered, the

question remains as to whether this evidence justified a grant of summary judgment in

49

favor of the State. The key inquiry here is whether the District Court’s interpretation and

application of the navigability for title test was correct, since this test sets forth the legal

standard the State must meet for summary judgment and also indicates the type and

quantum of evidence PPL must present in order to raise a genuine issue of material fact.

¶98 Broadly speaking, the District Court perceived the navigability for title test as

somewhat “fluid.” For instance, the District Court concluded that the test allowed

present-day usage to be probative as to navigability of a river at the time of statehood.

The District Court also concluded that portages do not defeat navigability, so long as the

river itself was used, or susceptible of being used, as a channel of commerce at the time

of statehood. These two points were crucial aspects of the District Court’s grant of

summary judgment on the navigability question due to the presence of rapids, falls, and

obstructions on the Clark Fork and Missouri Rivers, and because the early usage of the

Madison River was admittedly not well-documented.

¶99 Our independent review of the caselaw in this area establishes unequivocally that

the District Court’s understanding of the navigability for title test was correct. The

concept of navigability for title purposes is very liberally construed by the United States

Supreme Court. A river does not have to experience “actual use” at or before the time of

statehood, so long as it was “susceptible” of providing a channel for commerce. “ ‘[T]he

true test of the navigability of a stream does not depend on the mode by which commerce

is, or may be, conducted, nor the difficulties attending navigation,’ and . . .‘it would be a

narrow rule to hold that in this country, unless a river was capable of being navigated by

steam or sail vessels, it could not be treated as a public highway.’ ” Utah, 283 U.S. at 76,

50

51 S. Ct. at 441 (quoting The Montello, 20 U.S. at 441). Moreover, “carrying places,”

portages, or other obstructions which require a resort to “artificial means” of navigation,

are not sufficient to defeat a finding of navigability. As stated by the United States

Supreme Court in The Montello,

Indeed, there are but few of our fresh-water rivers which did not originally

present serious obstructions to an uninterrupted navigation. In some cases

. . . they may be so great while they last as to prevent the use of the best

instrumentalities for carrying on commerce, but the vital and essential point

is whether the natural navigation of the river is such that it affords a

channel for useful commerce. If this be so the river is navigable in fact,

although its navigation may be encompassed with difficulties by reason of

natural barriers, such as rapids and sand-bars.

The Montello, 87 U.S. at 443.

¶100 Additionally, the term “commerce” in the navigability for title context is very

broadly construed. For instance, in Utah, the United States Supreme Court explicitly

embraced the notion that emerging and newly-discovered forms of commerce can be

retroactively applied to considerations of navigability.

[T]he government urges that the consideration of future commerce is too

speculative to be entertained. Rather is it true that, as the title of a state

depends upon the issue, the possibilities of growth and future profitable use

are not to be ignored. Utah, with its equality of right as a state of the

Union, is not to be denied title to the beds of such of its rivers as were

navigable in fact at the time of the admission of the state either because the

location of the rivers and the circumstances of the exploration and

settlement of the country through which they flowed had made recourse to

navigation a late adventure or because commercial utilization on a large

scale awaits future demands. The question remains one of fact as to the

capacity of the rivers in their ordinary condition to meet the needs of

commerce as these may arise in connection with the growth of the

population, the multiplication of activities, and the development of natural

resources. And this capacity may be shown by physical characteristics and

experimentation as well as by the uses to which the streams have been put.

51

Utah , 283 U.S. at 83, 51 S. Ct. at 443-44.

Because navigability is based upon a broad definition of commerce combined with an

“actual” or “susceptible of use” standard, present-day usage of a river may be probative

of its status as a navigable river at the time of statehood. See Ahtna, 891 F.2d at 1404-05.

¶101 The evidence presented by the State was clearly sufficient to demonstrate

navigability in fact under this test, and entitlement to judgment as a matter of law.

Despite the presence of portages along the Clark Fork and Missouri Rivers, the historical

evidence establishes that they provided a channel for commerce at the time of statehood,

or were susceptible of such use. While the historical usage of the Madison was not as

well-established, the evidence of a log float on its middle portion in the 19th century,

combined with its present-day usage, demonstrates that this river was susceptible of

providing a channel for commerce at the time of statehood.

C. The Existence of Genuine Issues of Material Fact Precluding Summary

Judgment on the Navigability of the Clark Fork, Missouri, and Madison Rivers

¶102 On appeal, PPL argues it has shown that genuine issues of material fact exist

regarding the navigability of each of these rivers. PPL notes that its expert, Dr. Emmons,

rendered an expert opinion declaring that each of these rivers were non-navigable at the

time of statehood, and based his opinions on the following sources: (1) a 1910 federal

court decree declaring portions of the Clark Fork non-navigable; (2) a congressional

report based on a 1930’s Corps of Engineers survey stating that the Madison river has

never been historically navigated and that commercial navigation on this river was

“entirely out of the question”; and (3) historic reports from the Corps of Engineers that

52

the Great Falls Reach of the Missouri is unnavigable, and that Stubbs Ferry Reach could

only be made navigable at great cost. Additionally, PPL notes that its fluvial

geomorphologist, Dr. Schumm, opined that the presence of PPL’s Hebgen and Madison

Dams on the Madison in the early 20th century “materially changed the flow

characteristics” of this river. Based on historic evidence of river depth, flow histograms,

and stage-discharge curves, Dr. Schumm opined that the Madison was not susceptible to

navigation at the time of statehood. See Opinion, ¶ 32.

¶103 Setting aside the fact that PPL relies upon precisely the type of second-hand

historical information which it has argued at length is unreliable and inadmissible in the

summary judgment context, we hold that this evidence was simply insufficient to raise a

genuine issue of material fact regarding navigability on the Clark Fork, Missouri, and

Madison Rivers. With respect to the Missouri, the obstructions of the Great Falls Reach

were insufficient to defeat a finding of navigability, because they were portaged by the

Lewis and Clark expedition, and many others, early in the 19th century, allowing the

Missouri to provide a useful channel of commerce. With respect to the Clark Fork and

Madison River, PPL’s sole evidentiary basis for raising a genuine issue of material fact

consists of conclusory statements regarding the navigability of portions of these rivers

made by a federal district court in 1910, and Corps of Engineers in the 1930s. Such

conclusory statements, without any specific factual support, are insufficient as a matter of

law to raise genuine issues of material fact. The fact that these statements were made in

the early 1900’s does not somehow cure them of their conclusory nature and lack of

specific factual basis. See Tin Cup, ¶ 54.

53

¶104 Dr. Schumm’s expert opinion regarding the flow changes in the Madison River

since the time of statehood likewise does not raise a genuine issue of material fact

regarding its susceptibility for commerce at the time Montana became a state. The

present-day recreational use is sufficient for purposes of “commerce” under Utah and

Ahtna. The fact that the seasonal variations on the Madison River have been altered to

depths of less than 1 foot by the presence of dams, fails to demonstrate that the Madison

was not susceptible for use as a channel of commerce at the time of statehood. Indeed, so

long as the Madison was susceptible for use during portions of the year, it is considered

navigable at the time of statehood under the navigability for title test. See Utah, 283 U.S.

at 87, 51 S. Ct. at 445 (noting that a river can be generally considered navigable unless its

use is “exceptional, being practicable only in times of temporary highwater.”).

¶105 Finally, PPL argues virtually every stretch of a river must be “navigable in fact”

and that particular stretches of a river which are non-navigable due to their physical

characteristics can defeat a finding of navigability with respect to the whole river, or

require a piecemeal classification of navigability—with some stretches declared

navigable, and others declared non-navigable. The source for this argument derives from

Utah. In that case, the United States Supreme Court considered the navigability of rivers

within the state of Utah of which the United States government sought title. The United

States sought to quiet Utah’s title to certain sections of portions of the Green, Colorado,

and San Juan Rivers in Utah. Utah, 283 U.S. at 71, 51 S. Ct. at 439. A special master

had been appointed to enter findings of fact regarding these rivers, some of which

contained long stretches of non-navigable waters. Specifically, the special master found

54

that a roughly 40-mile stretch of the Colorado River, beginning at the confluence of the

Green and Grand Rivers in Utah, was non-navigable. Utah, 283 U.S. at 79, 51 S. Ct. at

442. The state of Utah challenged the special master’s findings only with respect to the

first 4.35 miles of this stretch of the Colorado. Utah, 283 U.S. at 80, 51 S. Ct. at 442.

¶106 The United States Supreme Court did consider the navigability with regard to

certain sections of the rivers, as opposed to the rivers themselves as a whole. However,

the Utah Court also emphasized the limited applicability of its approach in the following

terms:

In the present instance, the controversy relates only to the sections of

the rivers which are described in the complaint, and the master has limited

his findings and conclusions as to navigability accordingly. The propriety

of this course, in view of the physical characteristics of the streams, is

apparent. Even where the navigability of a river, speaking generally, is a

matter of common knowledge, and hence one of which judicial notice may

be taken, it may yet be a question, to be determined upon evidence, how far

navigability extends. The question here is not with respect to a short

interruption of navigability in a stream otherwise navigable, or of a

negligible part, which boats may use, of a stream otherwise nonnavigable.

We are concerned with long reaches with particular characteristics of

navigability or nonnavigability, which the master’s report fully

describes.

Utah, 283 U.S. at 77, 51 S. Ct. at 441 (footnotes omitted) (emphasis added). The United

States Supreme Court ultimately agreed with the state of Utah that the first 4.35 miles of

the disputed stretch were navigable and reversed the findings of the special master on this

point. Utah, 283 U.S. at 89-90, 51 S. Ct. at 446.

¶107 PPL urges this Court to rely upon Utah and declare certain portions of the rivers at

issue in this case—such as the Great Falls Reach of the Missouri River and the rapids and

the obstructions to navigation in the vicinity of PPL’s Thompson Falls Project on the

55

Clark Fork River—non-navigable. We decline the invitation to do so, and find PPL’s

reliance on Utah misplaced. In Utah, the overall non-navigability of the 40-mile stretch

of the Colorado River was not disputed by either party, and was never ruled upon by the

Supreme Court itself. Instead, the state of Utah merely disputed whether the first 4.35

miles of this stretch were non-navigable. Furthermore, as the Utah Court made clear, the

“section-by-section” approach does not apply to “short interruption[s] of navigability in a

stream otherwise navigable . . . .” Utah, 283 at 77, 51 S. Ct. at 441. In Utah there was no

evidence presented that the remaining non-navigable 36-mile stretch of the Colorado was

ever successfully portaged, or that it was merely a “short interruption” in the overall

navigability of this portion of the Colorado River.

¶108 Here, PPL has not put forth any evidence whatsoever of “long reaches of

non-navigability” but instead merely points to relatively short interruptions in the Clark

Fork, Missouri, and Madison Rivers which impede uninterrupted navigation, but do not

affect the actual use or susceptibility of use of these rivers as channels for commerce in

Montana at the time of statehood. The Great Falls Reach, even though a roughly 17-mile

stretch of the Missouri River, is merely a short interruption in the use of the Missouri as a

channel for useful commerce, as evidenced by the Lewis and Clark expedition’s portage

of this area, and the well-documented actual use of the Missouri subsequent thereto. See

e.g. Mont. Power Co., 185 F.2d at 493-94. The same is true with respect to the Clark

Fork River—even though there are interruptions to unimpeded navigation on this river in

the vicinity of PPL’s Thompson Falls project, the actual use of the Clark Fork is

documented from the Pend Oreille Lake at least to this river’s confluence with the

56

Blackfoot River. PPL’s dams on the Madison River are also merely short interruptions in

the navigation of this river as well. The present-day usage of the Madison is probative as

to its “susceptibility of use” at the time of statehood, and it is self-evident that any

obstructions on the Madison do not defeat its current use as a channel for commerce

within the state of Montana.

¶109 PPL’s evidence of relatively short interruptions of navigability in the rivers at

issue is insufficient as a matter of law under Utah to declare any portions of these rivers

non-navigable. Furthermore, under Utah’s expansive definition of the “susceptible of

use” standard, it is equally clear that the present-day usage of the Madison, Clark Fork,

and Missouri Rivers demonstrates that these rivers were susceptible of providing a useful

channel of commerce throughout the state of Montana at the time of statehood.

D. Conclusion

¶110 From the foregoing analysis, we conclude the District Court did not err in granting

summary judgment to the State on the issue of whether the Clark Fork, Missouri, and

Madison Rivers were “navigable in fact” at the time of Montana statehood 1889. Under

the navigability for title test, Montana has held title to these riverbeds beginning in 1889.

According to the equal footing doctrine, the disposition, use, and ownership interests in

the beds of these rivers has been governed by state law since that time. Mont., 450 U.S.

at 551, 101 S. Ct. at 1251.

¶111 One of the issues raised by PPL in this appeal concerns the District Court’s failure

to rule on its motion to amend, and the extent to which the District Court improperly

relied on PPL’s admissions in rendering its decision on the navigability question. See

57

Opinion, ¶¶ 42-43. The District Court should have ruled upon this motion to amend prior

to its summary judgment decision on this issue. However, it is equally true that PPL did

not raise this omission until the trial was well underway, long after the final pretrial order

had been issued. In any event, we have not relied upon any ostensible admissions made

by PPL in our analysis regarding the navigability of these rivers in its responsive

pleadings.

¶112 In summary, under de novo review, we conclude that the District Court’s ultimate

ruling on the navigability of the Clark Fork, Missouri, and Madison Rivers at the time of

statehood was correct. It is an axiom of Montana law that we will affirm a district court

if it reaches the right result, even though its reasoning may not be entirely correct. Good

Schs. Missoula, Inc. v. Missoula Co. Pub. Sch. Dist. No. 1, 2008 MT 231, ¶ 24, 344

Mont. 374, 188 P.3d 1013. Thus, we affirm the District Court on this issue.

¶113 Issue Two: Did the District Court err in granting summary judgment to the State

on the issue of whether Montana’s navigable riverbeds are school trust lands?

¶114 PPL argues that the District Court erred in concluding that the riverbeds at issue

are school trust lands. PPL claims that the riverbeds are not lands specifically indentified

in the Enabling Act, nor are they school trust lands under Article X, Section 2 of the

Montana Constitution. Rather, PPL asserts, the riverbeds are public lands subject to the

public trust doctrine this Court discussed in Curran. See Curran, 210 Mont. at 47-48,

682 P.2d at 167-68.

¶115 The District Court rejected the argument that the riverbeds fell under the terms of

the Enabling Act, or Article X, Section 2 of the Montana Constitution. The District Court

58

then determined, based on the plain meaning of the term “grant” as used in Article X,

Section 11(1), that the riverbeds were in fact public trust lands of the State. From this

point, the District Court went on to conclude that the riverbeds were school trust lands on

the theory that the Land Board had the authority to classify them as such. However, as

PPL notes, the Land Board has never taken this action.

¶116 We conclude that the District Court was correct in concluding that the riverbeds

are public trust lands pursuant to Article X, Section 11(1) of the Montana Constitution.

However, the District Court erred in concluding that the riverbeds were school trust lands

on the assumption that the Land Board could, in theory, classify them as such. Even if

the Land Board could arguably classify the riverbeds as school trust lands, the simple fact

remains that it has not done so.9

¶117 We reverse the District Court’s determination that the riverbeds are school trust

lands, and hold instead that they are public trust lands under Article X, Section 11(1) of

the Montana Constitution. Although we conclude the riverbeds at issue are not school

trust lands, the Land Board is still required to administer these lands in accordance with

the trust obligations imposed by Article X, Section 11 of the Montana Constitution. As

such, the riverbeds are held “in trust for the people” and shall not “ever be disposed of

except in pursuance of general laws providing for such disposition, or until the full

market value of the estate or interest disposed of, to be ascertained in such manner as

may be provided by law, has been paid or safely secured to the state.” Mont. Const. Art.

X, § 11(2); See Norman v. State, 182 Mont. 439, 444, 597 P.2d 715, 718 (1979).

9

We express no opinion on whether the Land Board has the legal authority to take such actions.

59

¶118 Issue Three: Did the District Court err in granting summary judgment on

whether the right to appropriate water for beneficial use of hydropower includes

the incidental right to use state land?

¶119 PPL argues the District Court erred when it concluded that its right to appropriate

water for the purposes of hydroelectric power generation did not include the incidental

right to use state land. The District Court determined that Montana law did not exempt

PPL from paying the State for the use of state lands while appropriating water for a

beneficial use. PPL claims that the right to appropriation includes the right to the means

of appropriation—in this case, the dams. Thus, PPL asserts it cannot be assessed rent for

its occupancy of state lands, as such occupancy is an incident of its lawful right to

appropriate water. PPL claims this position is supported by a number of cases, including

Smith v. Denniff, 24 Mont. 20, 60 P. 398 (1900), United States v. Conrad Inv. Co., 156 F.

123 (D. Mont. 1907), Prentice v. McKay, 38 Mont. 114, 98 P. 1081 (1909), and more

recently Mattson v. Mont. Power Co., 2009 MT 286, 352 Mont. 212, 215 P.3d 675.

¶120 In response, the State notes that PPL does not hold title to the riverbeds at issue,

and has not acquired an easement over state lands to appropriate water. For this reason,

the State argues that PPL’s reliance on the cases cited above is misplaced since they

involved preexisting easements, or the appropriation of water on federal lands. In short,

the State claims that no state law permits the free appropriation of water on state lands, or

immunizes PPL from the HRA’s requirement to pay compensation.

¶121 We affirm the District Court. The cases relied upon by PPL simply do not

establish that PPL has a right to make free appropriation of waters on and within

state-owned lands without paying any compensation to the State. Denniff and Mattson,

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for instance, stand for the unremarkable proposition that the right of appropriation

includes the right to an appropriate means of diversion. See Mattson, ¶¶ 37-40

(discussing necessary incidents of use for an easement held by PPL at a dam on Flathead

Lake); Denniff, 24 Mont. at 28-30, 60 P. at 401-02 (discussing the ability of a valid water

appropriator to acquire an easement over private land in order to exercise his right to

appropriation). In Prentice, this Court observed that while the State recognizes the rights

of individuals to acquire the use of water by appropriation, such use is nonetheless

subject to the requirements of state law. Prentice, 38 Mont. at 117, 98 P. at 1083.

Finally, as the State correctly notes, Conrad Inv. involved federal, not state land, and has

no bearing on the operation of state law in this case.

¶122 Simply put, the cases cited do not stand for the proposition that PPL’s use and

appropriation of the water, and the incidents necessary to enjoy such appropriation, affect

or limit the State’s ownership interests in the riverbeds, the State’s ability to subject such

use to the requirements of Montana law, or its ability to seek compensation for an

appropriation of water occurring entirely upon public lands. None of these cases

demonstrate that PPL’s right of appropriation of water and its use of dams to occupy

Montana’s riverbeds, occurring as it does entirely within the public lands of Montana, is

somehow exempted from the operation of the Montana Constitutions of 1889 and 1972,

and the HRA. For these reasons, the District Court did not err in concluding that PPL’s

appropriation of water does not include an incidental right to the free use of state land,

and that PPL is required to pay the State compensation for the use of the state-owned

riverbeds.

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¶123 Issue Four: Did the District Court err in granting summary judgment regarding

the availability of PPL’s affirmative defenses against the State’s claims?

¶124 PPL contends that the District Court erred in granting summary judgment to the

State regarding the availability of affirmative defenses against the State’s claims for

compensation. PPL argues that the State’s claims are barred by §§ 27-2-103 and

70-19-302, MCA. Section 27-2-103, MCA, states that the limitations on causes of

actions set forth in Title 27, chapter 2, part 2, MCA, “apply to actions brought in the

name of the state or for the benefit of the state in the same manner as to actions by private

parties.” PPL claims that statutes of limitations regarding trespass (§ 27-2-207(1),

MCA), negligence (§ 27-2-204(1), MCA), liability created by statute (§ 27-2-211(1)(c),

MCA), and action not founded upon contract or promise (§ 27-2-202(3), MCA),

variously apply to bar the State’s claims for compensation. Furthermore, PPL argues that

§ 70-19-302, MCA, sets a 10-year statute of limitations on actions brought by the State

respecting “real property or the issues or profits thereof by reason of the right or title of

the state to the same,” and also applies in the instant case.

¶125 The State counters that § 70-19-302, MCA, is inapplicable since it applies only to

“all lands sold and conveyed before July 1, 1955, by the state of Montana for which a

valid consideration was received by the state; provided that the state, at the time of any

such sale or conveyance, was not precluded by the constitution of Montana or by the

terms of the grant of such lands by the United States from selling and disposing of the

same . . . .” Section 70-19-301, MCA. Here, the riverbeds were never sold to PPL, nor

could the State have alienated these lands in violation of the Montana Constitution.

62

Second, the State argues that the statute of limitations defenses must yield in this case to

the riverbeds’ status as public trust lands. The State claims that the application of statutes

of limitation would violate the Montana Constitution under Norman and State ex. rel.

Boorman v. State Bd. of Land Commrs., 109 Mont. 127, 94 P.2d 201 (1939). For these

reasons, the State urges us to affirm the District Court.

¶126 We agree with the State that § 70-19-302, MCA, is inapplicable to the case at bar.

As § 70-19-301, MCA, makes abundantly clear, this section cannot apply to the riverbeds

at issue because they were never, nor could they be, alienated from the public trust.

Furthermore, we agree with the District Court and the State that the statute of limitations

defenses which are applicable in a normal civil suit do not apply here because the

riverbeds are public trust lands under Article X, Section 11 of the Montana Constitution.

See Norman, 182 Mont. at 446, 597 P.2d at 719 (noting that the government’s efforts to

enforce and maintain a policy respecting lands held in the public trust trumps the

equitable and legal affirmative defenses which are normally available against State

actions); see also Chennault v. Sager, 187 Mont. 455, 460, 610 P.2d 173, 176 (1980)

(stating that the interests of the general public should not be defeated by the unauthorized

or unlawful acts of public agents or officers) (citing Norman). The Land Board and the

State both have a fiduciary obligation under the Montana Constitution to seek

compensation for the use of state-owned lands. The HRA provides the statutory

mechanism for assessing this compensation. The State and Land Board’s lack of

diligence in carrying out these trust duties cannot be asserted as an affirmative defense

63

against the State’s claims. Thus, we affirm the District Court’s decision to bar PPL’s

assertion of affirmative defenses against the State.

¶127 Issue Five: Did the District Court err in concluding that the HRA applied to the

Thompson Falls and Missouri-Madison Projects?

¶128 The resolution of this issue involves two distinct inquiries: (1) whether the

District Court erred in granting summary judgment to the State on the federal preemption

of the HRA and in rejecting PPL’s “as-applied” challenged to the HRA; and (2) whether

the HRA can be lawfully applied to PPL’s hydroelectric facilities.

A. The Federal Preemption and “As-Applied” Challenges to the HRA

¶129 In response to summary judgment motions filed by PPL, the District Court ruled

that § 77-4-203, MCA, of the HRA was preempted by federal law, see Opinion, ¶¶ 16-17,

but nonetheless held that the remaining provisions of the HRA were not federally

preempted and that the State/Land Board was permitted to seek compensation from PPL.

After trial, the District Court also rejected PPL’s “as-applied” preemption challenge to

the HRA. PPL argues the District Court erred in these rulings. PPL claims that the HRA

is in irreconcilable conflict with the FPA and FERC licensing requirements. Specifically,

PPL maintains that the HRA’s limitation of a 50-year lease in §§ 77-4-201 and -209,

MCA, conflicts with the FPA’s requirements that the lands affected by a FERC-licensee

must be held by that licensee “in perpetuity.” See Opinion, ¶ 68.

¶130 Furthermore, PPL notes that the FPA invests FERC with the sole discretion of

choosing the operator for a hydropower site. 16 U.S.C.A. §§ 797(e), 800(a) (West 2010).

The FPA’s implementing regulations also invest FERC with the sole discretion regarding

64

the transfer of a license. 16 U.S.C.A. § 801 (West 2010); 18 C.F.R. §§ 9.1-9.3 (2010).

PPL argues that the HRA contains several provisions, in addition to Section 203—which

was stricken by the District Court—that invest the Land Board with precisely the type of

licensing discretion reserved solely to FERC. For instance, § 77-4-204, MCA, allows the

Land Board to conduct a “preliminary examination as to the value of the power site, as to

the plans of development submitted by the applicant, and of all other matters relating to

the proposed development as it deems necessary for the proper disposition of the

business.” Sections 77-4-205 through -207, MCA, describe the bidding process the Land

Board is required to follow prior to granting a lease, including a provision to give

preferences to municipalities. PPL contends that the application of these provisions is in

conflict with the discretion granted to FERC under the FPA. PPL also asserts that the

HRA’s 50-year lease limitation and bidding/examination provisions stand as an obstacle

to the FPA’s objectives and are federally preempted.

¶131 In this connection, PPL argues that the HRA cannot survive a severability analysis

because the core of this act is regulatory in nature. As we stated in Finke v. State, 2003

MT 48, 314 Mont. 314, 65 P.3d 576, “[w]hen a law contains both constitutional and

unconstitutional provisions, to determine whether the unconstitutional provisions are

severable, we examine the law itself for the existence of a severability clause. If there is

no such clause, we must determine whether the unconstitutional provisions are necessary

for the integrity of the law or were an inducement for its enactment.” Finke, ¶ 25. PPL

notes that the HRA does not contain a severability clause. It furthers contends that

Sections 203 through 207 demonstrate that the core of the HRA is regulatory in nature.

65

As such, the core of the HRA is in direct conflict with the regulatory authority given to

FERC under the FPA. For this reason, PPL argues the operation of the HRA is entirely

preempted.

¶132 The State claims the HRA is not federally preempted by the FPA. In this

connection, the State notes that the FPA requires licensees to compensate landowners for

the use of their property. Regarding PPL’s severability argument, the State contends that

the core of the HRA is not regulatory, but rather compensatory in a manner consistent

with the Land Board’s constitutional obligation to seek recompense for the use of public

trust lands.

¶133 We agree with the State. The core of the HRA is compensatory, not regulatory.

The fundamental purpose of the HRA as stated in § 77-4-201, MCA, is to ensure that the

Land Board is able to obtain compensation for the use of state-owned lands which are

used by hydroelectric facilities. The FPA permits private landowners, including states, to

seek and receive compensation for the use of their land. The core of the HRA is not in

conflict with the FPA and survives the federal preemption and severability analyses.

While PPL objects that the bidding process described in §§ 77-4-204 through -207,

MCA, conflicts with FERC’s exclusive jurisdiction to issue and/or transfer licenses, the

fact is that the State has never resorted to such a process. If the bidding process discussed

in §§ 77-4-204 -207, MCA, was at some point utilized and ran afoul of FERC

requirements, then it would arguably be preempted on an “as applied” basis. However,

no such conflict exists at the present. Moreover, even if such further preemption of the

66

HRA were to occur, it would not alter the fact that the core of the HRA is compensatory,

not regulatory, in nature.

B. PPL’s Challenge to the Application of the HRA

¶134 PPL also claims that the HRA is being “retroactively” applied to it in a manner

contrary to law. PPL correctly notes that the HRA does not contain a retroactivity clause,

and argues that its language indicates it was designed to apply to the development of

future power sites. See § 77-4-204, MCA (stating that the Land Board examines “matters

related to the proposed development . . . .”); § 77-4-206, MCA (stating that the Land

Board is to determine whether a lease applicant is “capable of carrying out the proposed

development . . . .”). Further, PPL argues that the HRA’s application in this case violates

principles of Montana law. Citing to Porter v. Galarneau, 275 Mont. 174, 911 P.2d 1143

(1996), PPL argues that application of the HRA would violate the prohibition against

retroactive application of the law because it “takes away or impairs vested rights acquired

under existing laws or creates a new obligation, imposes a new duty, or attaches a new

disability in respect to transactions already passed.” Porter, 275 Mont. at 183, 911 P.2d

at 1148-49 (quotations omitted). Among these new obligations, PPL argues, is the

requirement that PPL pay the State approximately $41 million dollars in back

compensation. The claimed impairment of PPL’s vested rights also includes the fact that

it may now be subject to competitive bidding proposals and possibly not be granted a

lease by the Land Board.

¶135 The District Court held that the HRA was not being retroactively applied in this

case because Montana acquired title to the riverbeds when it became a state in 1889 and

67

Article XVIII, Sections 1 and 3, of the 1889 Montana Constitution—which predate the

construction of any of PPL’s dams—specifically prevented the state from selling or

conveying interests in public state lands without obtaining full market value for them.

Thus, neither PPL nor MPC could claim a vested interest in using the State’s riverbeds

for free. See Opinion, ¶ 57.

¶136 We agree with the District Court’s reasoning on this point. In providing a

statutory basis for leasing state-owned power sites, the HRA codifies an aspect of a

constitutional provision which was extant in 1889. MPC and PPL took ownership of the

dams subject to the constitutional trust status of these state lands. See Montrust, ¶ 19

(citing Dept. of State Lands v. Pettibone, 216 Mont. 361, 375, 702 P.2d 948, 956-57

(1985)). While PPL claims that the HRA’s bidding process may arguably cause it to

lose its ability to operate the dams, that situation is not before the Court in the present

appeal, nor is it even remotely probable.10

¶137 PPL also argues that the HRA was intended to apply only to Section 17 and 36

school trust lands, and not to the non-school trust riverbeds at issue in this case. As

support for this contention, PPL points to various legislative and supporting materials

which it claims show the Legislature never intended the HRA to apply to dams which

were already located on the riverbeds in 1931.

¶138 The starting point for statutory construction is the plain language of the statute,

and if the plain language is clear and unambiguous no further interpretation is required.

10

In this connection, we note that the State is seeking damages for past due rent and is simply

requesting that PPL enter into a leasing agreement with the Land Board—an action which both

Pacificorp and Avista have already taken.

68

Vader v. Fleetwood Enterprises, Inc., 2009 MT 6, ¶ 30, 348 Mont. 344, 201 P.3d 139.

As noted above (see Opinion, ¶¶ 54-55), § 77-1-101(6), MCA (2005), states that the

provisions in Title 77 apply to “state lands.” The riverbeds at issue are state lands within

the meaning of § 77-1-101(6), MCA (2005). Thus, as the plain language of the HRA and

Title 77 demonstrates that the statute applies to PPL’s facilities, resort to other methods

of statutory construction is not required.

¶139 We accordingly conclude that the District Court did not err in determining that the

HRA was not federally preempted by the FPA, and that it could be lawfully applied by

the State to seek compensation for PPL’s use of state-owned riverbeds at its hydroelectric

facilities.

¶140 Issue Six: Did the District Court err in its calculation of damages?

¶141 Before turning to the methodology and reasoning employed by the District Court

in its calculation of an award of damages, we take note of the legal basis upon which this

award was granted. In the District Court’s conclusions of law in the Final Order, it held

that: (1) the riverbeds are state school trust lands; (2) the State has a constitutional duty

to obtain full market value for their use under the Montana Constitution; (3) under

§ 77-4-208, MCA, of the HRA, the rental for power sites “shall be not less than full

market value . . . .”; (4) the FPA did not preclude the State from seeking compensation

for PPL’s use of state-owned lands; and (5) the State was entitled to compensation based

on the “shared nets benefits” methodology and the acreage computation presented by its

experts. From this, the District Court concluded that the State was entitled to

compensation from PPL for the years 2000 through 2007.

69

¶142 PPL argues the District Court committed reversible error by failing to specify the

legal basis for the State’s damages claim. PPL contends that while the District Court

seems to have awarded damages based solely under the HRA, the HRA, by itself, does

not provide a cause of action for damages in this case. The State responds by suggesting

that its claim is constitutional in nature, but does not provide any direct argument beyond

that.

¶143 The District Court concluded that the State/Land Board had the constitutional

authority to seek compensation for PPL’s use of state-owned lands under Article X,

Section 11 of the Montana Constitution. The State, in its counterclaims, had sought a

declaration to this effect under the Uniform Declaratory Judgment Act (UDJA), Title 27,

chapter 8, MCA. Section 27-8-201, MCA, of the UDJA reads as follows:

Courts of record within their respective jurisdictions shall have power to

declare rights, status, and other legal relations whether or not further relief

is or could be claimed. No action or proceeding shall be open to objection

on the ground that a declaratory judgment or decree is prayed for. The

declaration may be either affirmative or negative in form and effect, and

such declarations shall have the force and effect of a final judgment or

decree.

¶144 By concluding that the riverbeds were state school trust lands and then declaring

that the State/Land Board had the constitutional obligation to seek compensation for their

use, the District Court essentially declared that the State had a right to seek compensation

and PPL was obligated to pay it.11 This declaration was sufficient to establish the legal

obligations between PPL and the State in this case on the question of compensation.

11

Although we conclude that the riverbeds in this case are public trust lands, instead of school

trust lands, the Land Board still has a constitutional and statutory duty to seek compensation for

their use. See Opinion, ¶¶ 116-117.

70

¶145 We now turn to the methodology and reasoning in support of the District Court’s

award of damages. From October 22 to October 30, 2007, a bench trial was held before

the District Court, the primary focus of which was to determine how much PPL owed the

State for its use of the state-owned riverbeds dating back to 1999, the year PPL acquired

the dams. At trial, the methodology to be used by the District Court in calculating the

amount of compensation due was vigorously contested. The State claimed that the

measure of damages payable by PPL was the full market value of the state-owned

riverbeds as used for hydroelectric generation, and that the HRA provided a statutory

mechanism for classifying and then valuing the riverbeds. The State’s expert Dr.

Duffield advocated for a valuation approach which he called the “shared net benefits”

method. Under this analysis, Dr. Duffield considered the amount of electricity generation

at PPL’s facilities, and multiplied that figure times the price of power that was being

returned, to calculate PPL’s gross revenues. From that, Dr. Duffield subtracted PPL’s

costs in generating power to arrive at a net income, or net revenue figure. Dr. Duffield

then apportioned this net income between PPL and the State, based on the State’s share of

the land associated with each facility.

¶146 Dr. Duffield presented several reasons in support of this proposed methodology.

First, he opined that it captured the productive value of the state-owned land in a manner

analogous to the share crop approach used in agricultural leases. Second, Dr. Duffield

opined that a similar method was used by FERC with respect to tribal lands, and had been

applied in analogous manner by the Maine Supreme Court in Maine Central Power.

Third, Dr. Duffield asserted that PPL’s status as a non-regulated, wholesale generator of

71

electricity warranted this method in order to prevent PPL from obtaining a “windfall

profit” which would not adequately be captured by other methods.12 Dr. Duffield’s

approach was also driven in large measure by his understanding that the State had a

fiduciary obligation under the Montana Constitution to obtain full market value for the

use of state lands.

¶147 PPL’s expert Saleba disputed the propriety of Dr. Duffield’s methodology and

advocated a methodology he termed the “cost method and comparables method in

tandem.” Under Saleba’s “cost method” approach, he used several different

methodologies to establish a fair market value for PPL’s hydroelectric facilities. Saleba

then determined the percentage of the value of the hydroelectric facilities attributable to

the land. Based on his analysis, Saleba concluded that 2.23% of the total value of PPL’s

hydroelectric facilities was “land-related.” Saleba then used this percentage, indexed

against the cost of the facilities minus depreciation, to arrive at a fair market value of the

land occupied by PPL’s facilities. From this fair market value figure, Saleba then

calculated the annual lease payments. To arrive at a lease figure, Saleba looked to data

from the United States Department of Agriculture for annual lease payments for different

types of land, as well as currently available commercial lease information for Montana

school trust land. From this, Saleba concluded an annual lease rate of 7% of fair market

value would be appropriate.

12

Because PPL is non-regulated, it does not receive a guaranteed rate of return, but instead

relies on the free market to determine what it will receive for its electricity. Thus, PPL could

stand to make enormous profits in some years based upon the going price for energy in the

deregulated markets. Dr. Duffield opined that a fixed lease rate which did not take account of

the “profits” generated by PPL would not reflect the productive value of the state-owned lands.

72

¶148 Saleba then applied this figure to the original cost minus depreciation of PPL’s

facilities and the total acreage of those facilities, to conclude that the fair market value

was $28 dollars per acre. Saleba also did an estimate based on the replacement cost of

the facilities, which produced a fair market value of $63 dollars per acre. Saleba also ran

calculations using state tax assessment data of PPL, to arrive at a fair market value of

$26.08 per acre.

¶149 To supplement this “cost methods” approach, Saleba also did a “comparables”

analysis to determine if there were any comparable state or federal lease rates which

could be used to gauge a lease rate for PPL’s facilities in Montana. Additionally, Saleba

relied upon the lease methodology utilized by FERC for the hydroelectric use of federal

lands pursuant to 18 C.F.R. § 11.2 (2010). This methodology sets an annual per-acre

charge for federal land flooded by a dam based on the schedule of fees for the use of

linear rights-of-way prepared by the U.S Forest Service. Saleba concluded that the

comparables he identified correlated well with the results arrived at by his cost methods

approach. Based on his calculations, Saleba concluded that the total annual lease

payments to the State for 2006 were $205,230 and $210,476 for 2007.

¶150 In its Memorandum, the District Court adopted the State’s approach, concluding it

was the most appropriate method to determine the full market value of the riverbeds. The

District Court noted that the State has a constitutional duty to obtain full market value for

the use of state-owned lands, and that the Land Board was specifically directed under §

77-1-202(1)(a), MCA, to “secure the largest measure of legitimate and reasonable

advantage to the state . . .” in the administration of state lands. Furthermore, § 77-4-208,

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MCA, of the HRA, specifically states the full market value use is “to be carefully

ascertained from all available sources.”

¶151 The District Court observed that the “shared net benefits” methodology had been

primarily used by FERC in assessments involving tribal lands, but had also been applied

in Central Maine Power Co. The District Court determined that riverbeds have “unique

characteristics” making them valuable for the production of hydropower, and that the

“shared net benefits” method best accounted for the economic contributions that the

riverbeds make to that production. The District Court also observed that PPL had not

cited to any cases where this methodology had been rejected.

¶152 In its findings of fact, the District Court defined the “shared net benefits” method

in the following terms:

Under the shared net benefits analysis, the net benefits are determined by

calculating the difference between the value of power produced and the cost

of producing that power. The net benefits are then shared between the

project owner and the land owners. The standard share is fifty percent to

the project owner and fifty percent to the land owners.

¶153 In applying this method, the District Court relied on data provided by Dr. Duffield.

Dr. Duffield utilized documents produced or publicly filed by PPL, and based his net

benefits calculations on the basis of state-owned riverbeds both above and below the

dams. For the Thompson Falls Project, Dr. Duffield arrived at a net benefits calculation

of $38,521,558 for the years 2000 through 2006. Dr. Duffield concluded that the State’s

share of this project was 27.3% based on its ownership of the riverbeds. Thus, he

concluded the total rents due, excluding interest, to the State for this period was

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$8,988,436. For 2007, applying this same analysis, Dr. Duffield concluded the rent for

the Thompson Falls Project was $1,950,592.

¶154 For the Missouri-Madison Project, Dr. Duffield arrived at a total net benefits

figure for the 2000 to 2007 timeframe of approximately $122 million dollars. Dr.

Duffield then looked at the percentage of state land associated with each separate facility

in the Missouri-Madison Project. Because the Hebgen Dam acts as a storage facility and

does not directly produce power, Dr. Duffield allocated its benefits to the generation

plants which were downstream of it. From this, Dr. Duffield determined a percentage of

the State’s share for each of the facilities in the Missouri-Madison Project. See Opinion,

¶ 76. Dr. Duffield concluded that for the Missouri-Madison Project, PPL owed the State

$25,759,825 for the 2000 to 2006 time period, and $4,257,327 for 2007, excluding

interest.

¶155 PPL argues the District Court erred in relying on Dr. Duffield’s methodology.

First, PPL contends that damages for rental value cannot be based on profits, citing

Pritchard Petroleum Co. v. Farmers Co-Op Oil & Supply Co., 121 Mont. 1, 190 P.2d 55

(1948), and Goodover v. Lindey’s, Inc., 255 Mont. 430, 843 P.2d 765 (1992). PPL bases

this argument on the notion that damages are being assessed against it in this case for

alleged “wrongful occupation” of property pursuant to § 27-1-318, MCA. Second, PPL

claims that Dr. Duffield’s methodology represents a sharp departure from the State’s

long-established practice of valuing riverbeds. PPL claims that the State’s previously

utilized valuation method for riverbeds consists of the following components: (1)

appraise the value of adjacent upland property; (2) take the unit value per acre or square

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foot; (3) multiply this value by the area that is encumbered or taken under the riverbed

easement; and (4) reduce this value by 50%. PPL contends that under principles of

agency law, the State is bound to adhere to its former practice in the instance case. Third,

PPL claims that the District Court erred in relying on calculations which included “below

dam” acreage not actually occupied by PPL’s dams. PPL asserts that the “below dam”

acreage consists of original riverbeds which have always been covered by water, and that

water below its dams is not unlawfully occupying or “trespassing” on state lands.

¶156 Finally, PPL asserts that the “shared net benefits” method has been applied by

FERC only to tribal lands, and that there are significant differences between state land

and tribal land which do not warrant the application of the methodology in this case.

Furthermore, PPL claims that the District Court’s version of the “shared net benefits”

methodology is not currently used by FERC and has, in fact, been rejected for decades.

PPL, citing to Portland Gen. Electric Co., 12 F.E.R.C. ¶ 63055, 1980 WL 24161 (1980),

claims that under the approved FERC methodology, only profits earned above a

company’s expected rate of return on equity are shared with the landowners. PPL argues

that Dr. Duffield’s failure to include its return on equity/capital costs as a cost of

producing power before he arrived at a net benefits figure is contradicted by the caselaw

as well as studies by the Government Accountability Office. For these reasons, PPL

asserts the District Court’s calculation of damages was erroneous, and its damage award

must be reversed and remanded.

¶157 The State argues the District Court did not err in its calculation of damages and

application of the “shared net benefits” methodology in this case. The State asserts that

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this methodology was used in Central Maine Power and applied by FERC and federal

courts to tribal lands, see Portland Gen. Elec. Co., 12 F.E.R.C. ¶ 63055, ¶ 65223, 1980

WL 24161**14-15, and United States v. Pend Oreille Co. Pub. Util. Dist. No. 1, 135 F.3d

602 (9th Cir. 1998), and is the most appropriate method to capture the full market value

of PPL’s use of state lands. The State also contends that this method accurately reflects

the general approach of trust land leasing by considering the productive value of the land

as used in the determination of agricultural, grazing, geothermal and wind-energy leases.

See Admin. R. M. § 36.25.110(1) (agricultural leases based on a “crop share rental

basis”); Admin. R. M. § 36.25.110(3) (grazing leases based on the “animal-unit-month

carrying capacity of the land to be leased or licensed”); and Admin. R . M . §

36.25.406(1)(a)(i) (geothermal lease rates based on percentage of the gross revenues of a

project). The State contends that this “income-based leasing” approach is also supported

by State ex. rel. Thompson v. Babcock, 147 Mont. 46, 409 P.2d 808 (1966), and the

purpose of the HRA itself. For these reasons, the State argues that the District Court’s

reliance upon Dr. Duffield’s calculations and conclusions was not erroneous.

¶158 The decision to use the “shared net benefits” methodology in this case was a

conclusion of law which we will review for correctness. Roe Family, L.L.C., ¶ 12. The

findings in support of the District Court’s award of damages will be reviewed for clear

error. Baltrusch v. Baltrusch, 2008 MT 245, ¶ 44, 344 Mont. 489, 190 P.3d 1034.

¶159 Here, the District Court did not err in its decision to rely on the “shared net

benefits” methodology presented by Dr. Duffield. First, we agree with the State that it is

proper to take account the productive value of the land in this case in order to arrive at a

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figure for the fair market value of PPL’s use of state-owned riverbeds. At trial, the State

presented evidence that DNRC already bases the rates for agricultural and wind leases on

the productive value of the land. The statutes and administrative regulations concerning

agricultural, grazing, and geothermal leases bolster this argument. Second, there is no

bar under Montana law for basing an award of damages on the profits made by PPL. As

noted repeatedly in this Opinion, the State/Land Board is under a fiduciary duty to obtain

full market value for the use of state lands. The HRA specifically provides that the

determination of full market value for the hydroelectric use of state lands is to be

“carefully ascertained from all available sources.” Section 77-4-208, MCA.

“Income-based leasing” is an appropriate methodology to use in calculating damages in

this case. See Babcock, 147 Mont. at 52-54, 409 P.2d at 811-12. Pritchard and

Goodover are inapposite because they involved damages for wrongful occupation of

property, as opposed to damages based on failure to provide the State compensation as

required under the Montana Constitution.

¶160 In determining the productive value of the state-owned lands for the purposes of

calculating damages in this case, it was not erroneous for the District Court to rely on Dr.

Duffield’s method of taking into account the profits of PPL’s hydroelectric projects, and

then sharing those profits, or benefits, with the State based on its percentage of ownership

of the project sites. Indeed, even though Saleba disagreed with the approach of Dr.

Duffield, he conceded at trial that this methodology could be used in this case for

purposes of assessing past damages. On direct examination, Saleba testified as follows

regarding Dr. Duffield’s method which he referred to as the “profitability method”:

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Also, on that profitability method I couldn’t figure out a way to do

this prospectively. It seemed like one of the things that the Court is going

to be challenged with for PP&L Montana is the amount break—or going

back to 2000, as well as coming up with the charge going forward.

And, you know, you could arguably use the profitability method

to go back and figure out what the profitability was from 2000 to 2006

or 2007. I don’t know how you use the profitability method to go forward.

(Emphasis added.)

¶161 Technically speaking, the methodology relied upon by Dr. Duffield is not what is

generally termed the “shared nets benefits” analysis. This method was described in

Portland Gen. Elec. Co., 20 F.E.R.C. ¶ 61294, 1982 WL 40297 (1982), working:

by comparing the cost of producing power at the project being evaluated

with the cost of producing an equivalent amount of power at a hypothetical

next-best alternative project. The difference in costs is referred to as the

net benefit of the project being evaluated. The net benefit is then allocated

between the parties intended to benefit from the project.

Portland General, 20 F.E.R.C. ¶ 61294, ¶ 61563, 1982 WL 40297 ** 33; see also Pend

Oreille, 135 F.3d at 609.

¶162 Dr. Duffield did not strictly follow this approach, because he did not consider the

“next available alternative” to hydroelectric generation. Instead, Saleba’s

characterization of Duffield’s approach as a “profitability” approach is indeed more

accurate. See Portland Gen. Elec. Co., 12 F.E.R.C. ¶ 63055, ¶ 65217, 1980 WL 24161

** 5 (discussing the profitability method). However, the approach was appropriate here

because the net benefits from PPL’s projects for the years 2000 to 2007 are already

known and are not based upon speculation. See Portland Gen. Elec. Co., 12 F.E.R.C.

¶ 63055, ¶ 65223, 1980 WL 24161 ** 14 (noting that the profitability method is

appropriate when actual cost figures are available for a given project).

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¶163 Moreover, we conclude that the District Court’s findings of fact in applying this

method were not clearly erroneous. Dr. Duffield’s profit figures were all provided by

PPL or taken from documents which PPL publicly filed. The inclusion of the “below the

dam” acreage in this case was not clearly erroneous because § 77-4-202, MCA, of the

HRA specifically defines “power site” as including “each separate tract of [state-owned]

land which will become part of the reservoir and which in and of itself makes an essential

contribution to the value of the power site as a whole of not less than 5% of the entire

value of such power site.” The inclusion of the “below the dam” acreage was

contemplated within the plain meaning of this statute, and it was not clearly erroneous for

the District Court to include it in its calculation of damages.

¶164 As PPL notes, Dr. Duffield’s approach considered the total profitability of PPL’s

facilities in Montana, but did not deduct PPL’s expected rate of return on equity prior to

an accounting of the net profits. PPL argues that under approved FERC methodology

only profits earned above a company’s expected rate of return on equity should be shared

with the landowners. PPL urges this Court to remand this issue to the District Court for a

recalculation of damages under Portland Gen. Elec. Co., 12 F.E.R.C. ¶ 63055, 1980 WL

24161 and Mont. Power Co., 38 F.P.C. 766, 1967 WL 113478 (1967), whereby the

District Court would only consider sharing those profits over and above PPL’s expected

rate of return on equity.13 PPL argues that Dr. Duffield’s methodology in this regard is

not supported by the case law and that it was error for the District Court to rely upon it.

13

Roughly speaking, PPL’s rate of return on equity is calculated by taking the amount of net

income for a given year and then dividing that number by the amount of PPL’s privately-held

equity (i.e., the amount of non-bank, and non-bond financing held by private investors in PPL).

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¶165 Although PPL is correct in noting that Dr. Duffield’s methodology is unique, it

has failed to demonstrate how it was incorrect for the District Court to rely upon this

methodology as a matter of law. At trial, Dr Duffield acknowledged that his

methodology was singular and unique, but presented a rationale for his departure from

the approaches in Portland Gen. Elec. Co. and Mont. Power Co. The utility companies in

both of those cases were regulated entities who were granted monopolies as well as a

guaranteed a rate of return by the state’s ratepayers. In exchange, the regulated utilities

provided energy at a guaranteed rate for the consumers. Dr. Duffield referred to this as a

“social contract” between the utilities and the rate-paying public. When considering the

shared nets benefits or “profitability” analysis in this type of context, deducting the

ratepayer’s return on equity was an appropriate consideration because the regulated

utilities are not granted a level of profitability above and beyond the guaranteed rate of

return.

¶166 Here, by contrast, PPL is an unregulated utility and its rate of return is determined

by market forces. Although PPL is not guaranteed a rate of return by Montana’s

ratepayers, there is no ceiling on the amount of profits that PPL can make in the

unregulated market. If the return on equity of PPL’s private investors is deducted before

assessing PPL’s “profitability,” the private investors are allowed to reap the benefits of

any “windfall” profits before sharing a fair portion of them with the State—even though

the state-owned land makes the hydroelectric facilities possible and contributes greatly

towards their profitability.

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¶167 Second, Dr. Duffield explained that that the riverbeds’ status as “trust lands”

required a methodology which properly took into account the State/Land Board’s

obligation to administer and dispose of those lands for the benefit of the people of

Montana. Dr. Duffield reasoned that allowing private investors to deduct their rate of

return prior to assessing PPL’s net profits, would run afoul of this principle. For these

reasons, Dr. Duffield employed his unique methodology and it was adopted by the

District Court.

¶168 PPL clearly disagrees with Dr. Duffield’s methodology. Yet aside from referring

to the Mont. Power Co. and Portland Gen. Elec. Co. cases and arguing that Dr.

Duffield’s methodology was unprecedented, PPL does not show why, under the

circumstances and evidence presented to the District Court, this methodology was

incorrect as a matter of law. Given the unique circumstances before the District Court,

and PPL’s status as an unregulated utility operating on public trust lands, the District

Court did not err as a matter of law in refusing to deduct a rate of return on privately-held

equity prior to assessing PPL’s profitability. Accordingly, we find no legal basis upon

which to reverse the District Court’s decision in this regard.

¶169 Finally, the District Court held that the terms of any future lease, including the

calculation of rent, must be approved by the Land Board. The case sub judice is

concerned solely with damages based on PPL’s failure to compensate the State/Land

Board for the use of public lands; thus, the damages in this case are past damages. The

methodology applied by the Land Board to the terms of a future lease may or may not be

the same methodology used by the District Court in calculating damages in this case.

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¶170 In closing, we take note of the fact that several amici in this case, including the

Montana Water Resources Association, the Gallatin Agricultural Irrigators, and the

Montana Farm Bureau Federation, have expressed concern that our decision here will

have a negative impact on their ability to appropriate water from rivers. While we do

conclude that the state-owned riverbeds are public trust lands and that PPL does not have

a right to use those riverbeds for free, this does not imply that all other water users will be

assessed a fee for usage in the same manner as PPL. As Article X, Section 11(2) of the

Montana Constitution makes clear, “[n]o such land or any estate or interest therein shall

ever be disposed of except in pursuance of general laws providing for such disposition, or

until the full market value of the estate or interest disposed of, to be ascertained in such

manner as may be provided by law, has been paid or safely secured to the state.” In other

words, the Legislature may pass “general laws” providing for the use of state-owned

riverbeds by various users of water. See e.g. Norman, 182 Mont. at 444, 597 P.2d at 718.

In this case, the HRA was the “general law” which the District Court used to assess

damages because it specifically provided for the disposition of state-owned lands

occupied by PPL’s facilities. Other general laws may (or may not) provide an assessment

method for irrigators, stockmen, recreationists, and other water users, in a manner that

takes account of the “public trust” with respect to these different classes of usage. While

the Land Board clearly has a fiduciary duty to administer Montana’s riverbeds in the

public interest, the Court’s decision today is cabined to the specific facts of this case and

the applicable provisions of the HRA.

CONCLUSION

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¶171 In general, we affirm the District Court’s award of damages. We affirm the

District Court’s conclusion that title to the riverbeds of the Missouri, Clark Fork, and

Madison Rivers passed to Montana when it became a state in 1889. However, we reverse

the District Court’s conclusion that the riverbeds are “school trust lands,” and instead

hold that they are public trust lands under Article X, Section 11. Our reversal on this

issue does not change the overall conclusions of the District Court, because under the

1889 and 1972 Montana Constitutions the State and Land Board have fiduciary

obligations to administer those lands for the benefit of the public.

¶172 Further, the HRA provides an appropriate mechanism with which to assess

damages owed by PPL to the State. The District Court did not err in adopting a

methodology for assessing damages based on the HRA, and its findings of fact in support

of its damage award were not clearly erroneous.

¶173 Finally, the District Court correctly left to the discretion of the Land Board the

ter

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