CHAPTER 5 THE ROLE OF MUNICIPALITIES IN GEOTHERMAL RESOURCE DEVELOPMENT
| Jurisdiction | United States |
(Jan 1977)
THE ROLE OF MUNICIPALITIES IN GEOTHERMAL RESOURCE DEVELOPMENT
and Michael Hammer
O'Melveny & Meyers
Los Angeles, California
Constitutional, Statutory and Charter Limitations on Municipal Financing of Geothermal Projects. Limitations on Financing Imposed by Outstanding Bond Covenants and Other Contractual Obligations. Innovative Techniques Developed by California Municipalities to Finance Geothermal Exploration and Development.
A. Introduction
Publicly owned electric systems play an important role in the electric utility industry of the United States. Generally, municipal electric systems are small operations. Eighty-five per cent serve 15,000 people or less.1 In the main, these municipal systems have no generation facilities of their own and instead rely on buying wholesale power from private utilities. Nevertheless, approximately 900 publicly owned electrical systems do generate all or a part of their power requirements, and of these, about 125 are located in the western states, where geothermal energy production seems most promising.2 And, there is evidence of an increasing commitment on the part of publicly owned utilities to acquire their own generating capacity. An annual survey by the American Public Power Association shows substantial increases in plant expenditures by such utilities in 1975 and 1976, with the bulk of such expenditures being dedicated to building generating capacity.3
Municipal activity in geothermal development has progressed beyond the talking stage in California. The Northern California Power Agency, a joint powers agency created by 11 California municipalities, has concluded an agreement with Resource Funding, Ltd. looking to the exploration and development of land under geothermal leases at The
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Geysers in Lake County, California. The City of Burbank is earnestly developing plans for financing its joint venture with Republic Geothermal to explore for steam in various sites in California and other western states. Certain of these sites are now under lease by the city, jointly with Republic Geothermal, from the federal government.
Further, the interest on the part of municipalities in geothermal development can be measured to some degree by noting the entities which have expressed an interest in the formation and activities of the Public Geothermal Resources Corporation, a non profit corporation formed to assist publicly owned electric utility systems in geothermal development in the western states. A perusal of the files of the American Public Power Association indicates interest by the following: the City of Eugene, Oregon; the Salt River Project in Phoenix, Arizona; the City of Los Angeles' Department of Water and Power; the Missouri Basin Municipal Power Agency (which includes municipalities from Iowa, Minnesota and South Dakota); the cities of Anaheim and Riverside, California; Seattle City Light; Intermountain Consumer Power Association (which includes Utah and Arizona municipalities and several rural electric cooperatives); the Northwest Public Power Association; the Northern California Power Agency; Arizona Municipal Power User's Association; the Mid-West Electric Power Consumer's Association; and the Raft River Rural Electric Cooperative.
From the lawyer's perspective, any analysis of the role a municipally owned utility can play in geothermal development must consider first the constitutional and statutory framework within which that utility operates. State and local governments, in sharp contrast to private corporations, are creatures with limited powers. A private corporation, generally speaking, may engage in any lawful undertaking that advances the purposes of the corporation articulated in its charter or articles of incorporation, subject to any expressed limitations in that charter or the articles, or in the corporation's by-laws. A municipal utility, on the other hand, must find express authority for its undertakings or at least must be able to imply such authority from other expressly granted powers. An example may be useful. A city may not engage in any phase of the
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electric utility business unless authorized by state law. Conceivably, the requisite constitutional or statutory authorization may be expressed to include only the distribution of electricity to the city's inhabitants. If so, the utility probably would be precluded from engaging in the generation of electricity, and more assuredly, from locating, exploring for, or developing fuel resources such as geothermal steam.
Moreover, a broad expression of power to engage in the electric utility business may not be sufficient to enable the publicly owned utility to participate in exploration activity. If the utility must borrow money to meet its commitments to such an endeavor, then an independently expressed power to undertake the financing must be found. Typically, that power can be found if the issuance of voter-approved, tax-supported general obligation bonds is a viable financing vehicle.33 Normally, the relevant statutory authorization permits the issuance of such bonds for "any municipal improvement" of the city. However, tracing the requisite statutory power takes on a rather labyrinthine quality when one considers revenue financing and other more esoteric financing vehicles.
This paper explores those provisions of California law affecting municipal utilities' interest in geothermal exploration, development and exploitation. The various problems encountered by the City of Burbank and the Northern California Power Agency are used as illustrations. Further, this paper considers the impact of self-imposed limitations in the form of outstanding bond covenants and other contractual obligations.
B. Provisions of State Constitutions, Statutes and Municipal Charters Affecting Participation in Geothermal Projects
Generally speaking, apart from the development of hydroelectric resources, municipal utilities have purchased their fuel supplies. Programs to locate and develop geothermal resources, then, raise novel questions as to whether such exploration activity is a proper purpose of a municipal utility and whether the authority to finance such activity
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exists. In Burbank's case, the City's capacity to issue electric revenue bonds for the purpose of funding the cost of the exploration and development of a geothermal supply first presented questions under its Charter.
The City of Burbank accepted the privilege of home rule under Sections 3 and 5 (formerly Sections 6 and 8) of Article XI of the California Constitution through the adoption of its Charter, giving it plenary powers over all municipal affairs, except as limited by the Charter and the Constitution.4 In the municipal affairs area, the provisions of a "freeholder" charter are viewed as a limitation on rather than a source of power, in that cities operating under such charters have plenary power over municipal affairs even though those powers are not spelled out with any degree of specificity, subject however to any express limitations in the charter. Any question that supplying utility services to municipal residents is a municipal affair is resolved by reference to Section 9 of Article XI in the California Constitution. That section reads in part as follows:
"A municipal corporation may establish, purchase, and operate public works to furnish its inhabitants with light, water, power, heat, transportation, or means of communication. It may furnish those services outside its boundaries, except within another municipal corporation which furnishes the same services and does not consent."
The conduct of the city's electric utility is unquestionably a municipal affair.5 Moreover, it is clear that this plenary power over municipal affairs may be exercised to some degree beyond the city's own boundaries, even though the charter does not expressly contemplate such extra territorial effect, unless of course there is a limit to the contrary expressed in the charter.6
Finding no other provisions in the Constitution restricting the city's capacity to participate in the project, one turns to the provisions of the city's Charter itself. Section 3.5 of the Charter provides:
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"The city shall have the power to contract with any governmental entity, regulated public utility, or other public or private corporation, to perform such services or to acquire, construct or administer jointly such public works, public utilities, or other facilities, either inside or outside the City Limits, as are beneficial to its citizens or the consumers of its utilities."
No other provisions of the Charter restrict the city's participation in the project.
In pursuance of its home rule powers, the city adopted a procedural ordinance for the issuance of revenue bonds. The ordinance, codified in Article 12 of Chapter 14 of the city's Municipal Code, provides in part as follows:
"The council...may, when the public interest and necessity require, by resolution or resolutions issue revenue bonds for the following purposes: (a) additions to and extensions and improvements of the electric energy system of the City and related facilities, (b) additions and extensions and improvements of the water system of the City and related facilities, and (c) the acquisition, construction, extension or improvement of any other revenue producing system or facility of the City."
No California cases have been found discussing the question whether exploration for fuel resources falls within the meaning of the phrase "additions to and extensions and improvements of the electric energy system of the City and related facilities", or similar language. It would seem, however, that the phrase can reasonably be construed to include such exploration.
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Some comfort in this analysis can be drawn by analogy from provisions of the California Public Utilities Code...
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