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King County v. King County Water Districts Nos. 20

Supreme Court of Washington, En Banc

December 5, 2019

KING COUNTY, Appellant,

          GORDON McCLOUD, J.

         King County enacted a first-of-its-kind ordinance that requires electric, gas, water, and sewer utilities to pay for the right to use the county's rights-of-way, a right known as a franchise. King County refers to its planned charge as "franchise compensation," and the amount charged is based on an estimate of the franchise's value. If the county and utility cannot agree on an amount, the county will bar the utility from using its rights-of-way.

         This case presents a facial challenge to King County's authority to charge franchise compensation. A secondary issue is whether water-sewer districts, defendants below, or private utilities, intervenors below, may use a county's rights-of-way without a franchise from the county. This case is decidedly not about whether any particular utility has an individual right, such as an express easement or a right grounded in an existing contract, to use a particular right-of-way without paying the county. Those issues are best resolved elsewhere, on a case-by-case basis. Instead, this case is about whether King County may charge franchise compensation generally, and if so, whether water-sewer districts or private utilities, on the whole, may avoid that charge by using the county's rights-of-way without a franchise.

         The superior court ruled that King County lacks the authority to charge franchise compensation. We reverse. We hold that generally, King County may charge franchise compensation. We also hold that water-sewer districts and private utilities have no general right to use King County's rights-of-way without a franchise.

         Factual and Procedural Background

         King County operates and maintains many miles of county roads. Clerk's Papers (CP) at 1244; see also RCW 36.75.020 (requiring counties to operate and maintain county roads). These roads are located in rights-of-way, which the county has acquired over time and through various means. CP at 1244-45. The rights-of-way and the roads within them are primarily used for transportation. But they also "provide convenient, continuous corridors for the placement of utilities, including sewer, water, telecommunications, power[, ] and gas." CP at 1247. Recognizing this, public and private utilities often enter into franchise agreements to use the county's rights-of-way. CP at 1247-48; see also RCW 36.55.010 (granting counties discretion to enter into these franchise agreements).

         Historically, King County charged a utility seeking to use a county right-of-way only an administrative fee. CP at 1248. This changed in November 2016, when the King County Council passed Ordinance 18403. CP at 1253-70. Under that ordinance and its accompanying public rule, King County now requires electric, gas, water, and sewer utilities to pay "franchise compensation," which the ordinance equates to an annual rent payment, in exchange for the right to use the county's rights-of-way. CP at 1254-55, 1260, 1264-65, 1272. This compensation requirement applies not only prospectively to future franchises but also retroactively to "existing franchises that include terms that authorize compensation in return for the right to use the right-of-way." CP at 1264.[1] The county estimated that the ordinance would generate approximately $10 million per year. CP at 288. Before the superior court, King County acknowledged that "no other county currently obtains franchise compensation." Report of Proceedings (July 27, 2018) (RP) at 10.

         The amount of franchise compensation due is subject to negotiation. CP at 1265, 1273. The county first determines an estimate by considering the following relevant factors:

the land value of right-of-way within the applicant's service area; the approximate amount of area within the right-of-way that will be needed to accommodate the applicant's use; a reasonable rate of return to King County for the applicant's use of the right-of-way; the business opportunity made available to the applicant; density of households served; a reasonable annual adjustment; and other factors that are reasonably related to the value of the franchise or the cost to King County of negotiating the franchise.

CP at 1265. Pursuant to Ordinance 18403, the Facilities Management Division of King County adopted Rule RPM 9-2, which establishes the methodology used to estimate franchise compensation. CP at 1265, 1272-76; see also CP at 1231-36 (explaining methodology). The county then provides that estimate to the utility, at which time the utility may counteroffer. CP at 1265, 1273. If the county and the utility cannot agree, then the county will not allow the utility to use the right-of-way. CP at 1260, 1273, 1276.

         After a number of water-sewer districts, which are special purpose local governments distinct from the county, made it known that they would sue, King County sought "a declaratory judgment validating its authority to enact Ordinance 18403 and its accompanying public rule." CP at 2-3. Six consumer-owned private utilities subsequently intervened. CP at 79-83.

         The parties filed cross motions for summary judgment. CP at 88-11.7, 1029-40, 1192-1216. The water-sewer districts and the private utilities argued that they have a right to use the county's rights-of-way without paying franchise compensation, that the county lacks the authority to charge franchise compensation, and that the charge is really an unlawful tax. CP at 88-117, 1029-40. King County argued that it has broad statutory authority to charge the utilities franchise compensation and that this authority is well supported by a long line of case law. CP at 1192-216; RP at 8. King County also argued that its status as a home rule county means that it has "powers as broad as the state, except where expressly limited"-and that its powers are not expressly limited here. RP at 9.

         King County Superior Court granted the water-sewer districts' and the private utilities' motions and denied King County's. CP at 2282-83. It reasoned that the county lacked authority to charge any utility, public or private, a fee in the nature of "rent" in exchange for a franchise. Specifically, the superior court stated, in its written order, that King County may "charge utilities for the reasonable administrative costs" of regulating its roads and rights-of-way, but that it "lacks authority to impose 'franchise compensation' or 'rent'" and "lacks the authority to require the utility defendants to pay, or to agree to pay, 'franchise compensation' or 'rent.'" CP at 2283. The court explained that "[f]ranchises are contracts which must be negotiated and agreed upon by the parties thereto, and King County may not require the utility defendants to enter into a franchise agreement by accepting King County's franchise terms." Id.\ see also CP at 2298 (oral ruling, incorporated by reference) ("The county . . . cannot compel its terms unilaterally on the utilities."). The court also stated that "[w]ater-sewer districts have statutory authority under RCW 57.08.005(3) and (5) to locate, operate and maintain their water and sewer facilities in 'public highways, roads, and streets.'" CP at 2283. The court was silent as to whether the intervening private utilities had similar statutory authority. See id. Striking down franchise compensation on these grounds, the superior court had no reason to and did not address whether the charge is a tax. In the end, the superior court struck the sections of the ordinance dealing with franchise compensation, along with the rule promulgated pursuant to the ordinance. CP at 2283-84.

         We granted direct review. Order, King County v. King County Water Districts et al, No. 96360-6 (Wash. Apr. 3, 2019). A number of amici filed briefs: Washington State Association of Counties, Washington Public Utility Districts Association, Washington Water Utilities Council, Washington Rural Electric Cooperative Association, Shawnee Water Association, Rental Housing Association of Washington, and Puget Sound Energy.[2]


         King County's plan to charge the utilities "franchise compensation" for the right to use its rights-of-way is innovative. The county admitted before the superior court that "no other county currently obtains franchise compensation." RP at 10. But four well-established legal principles provide a useful framework for analysis.

         First, a county may grant a franchise to a utility-but it does not have to. RCW 36.55.010; City of Spokane v. Spokane Gas & Fuel Co., 175 Wash. 103, 107, 26 P.2d 1034 (1933) (explaining that a "municipality may refuse to grant a franchise at all" (citing State ex rel. Spokane & B.C. Tel. & Tel. Co. v. City of Spokane, 24 Wash. 53, 63 P. 1116 (1901))). A county's discretion is broad: if it decides to grant a franchise, "it may do so on its own terms, conditions and limitations." Spokane Gas & Fuel Co., 175 Wash, at 107. For instance, a county "may require compensation for the use of the public streets as a condition for granting a franchise, unless forbidden by statute or contrary to public policy." Burns v. City of Seattle, 161 Wn.2d 129, 144, l64P.3d475 (2007) (citing 12 Eugene McQuillin, The Law of Municipal Corporations § 34.52, at 199-200 (3d ed. 2006)).

         Second, although King County has broad discretion to grant a franchise, it may not compel a utility to accept its terms, conditions, and limitations. Burns, 161 Wn.2d at 142; Gen. Tel. Co. of Nw., Inc. v. City of Bothell, 105 Wn.2d 579, 584, 586, 716 P.2d 879 (1986); City of Lakewood v. Pierce County, 106 Wn.App. 63, 74, 23 P.3d 1 (2001). A franchise is a contract, and like all contracts, both sides must agree to the terms. Id. The superior court correctly recognized this legal principle. CP at 2298 ("The county . . . cannot compel its terms unilaterally on the utilities."). This does not mean that a county or a utility may not consider certain terms, such as franchise compensation, nonnegotiable. It simply means that both sides must agree to the terms before an agreement is reached.

         Third, King County, which is a home rule county, '"has as broad legislative powers as the state, '" at least when it comes to local affairs. King County Council v. Pub. Disclosure Comm 'n, 93 Wn.2d 559, 562-63, 611 P.2d 1227 (1980) (quoting Winkenwerder v. City of Yakima, 52 Wn.2d 617, 622, 328 P.2d 873 (1958)). This broad power means that generally, King County may legislate as it sees fit, so long as it does so within the confines of state and constitutional law. Id. However, King County may not tax without express authorization from the legislature. Ski Acres, Inc. v. Kittitas County, 118 Wn.2d 852, 855, 827 P.2d 1000 (1992) (citing Hillis Homes, Inc. v. Snohomish County, 97 Wn.2d 804, 809, 650 P.2d 193 (1982)).

         Fourth, water-sewer districts, which are special purpose local governments, have only those powers that are expressly granted to them, those that are '"necessarily or fairly implied in or incident to the powers expressly granted, '" and those that are '"essential"' to its '"objects and purposes.'" Filo Foods, LLC v. City of SeaTac, 183 Wn.2d 770, 788, 357 P.3d 1040 (2015) (quoting Port of Seattle v. Wash. Utils. & Transp. Comm 'n, 92 Wn.2d 789, 794-95, 597 P.2d 383 (1979)). The intervening private utilities have no governmental powers-and no right to use county rights-of-way without consent. See Baxter-Wyckoff Co. v. City of Seattle, 67 Wn.2d 555, 560, 408 P.2d 1012 (1965). Thus, the water-sewer districts and private utilities before us can act only if state law has granted them the authority to do so.

         According to these well-established legal principles, King County may charge franchise compensation if it is not an unauthorized tax and if doing so will not conflict with state law. Even if King County may charge franchise compensation, however, it may not compel a utility to accept franchise compensation as a franchise term. But if a utility does not accept, it may not use the county's rights-of-way without some other source of authority to do so. Thus, the questions before us are (1) whether the charge is actually an unauthorized tax, (2) whether the charge conflicts with state law, and (3) whether the utilities may use the rights-of-way without a franchise. These are all issues of law, which we review de novo. Howe v. Douglas County, 146 Wn.2d 183');">146 Wn.2d 183, 188, 43 P.3d 1240 (2002) (citing Rivett v. City of Tacoma, 123 Wn.2d 573, 578, 870 P.2d 299 (1994), overruled in part on other grounds by Chong Yim v. City of Seattle, No. 96817-9 (Wash. Nov. 14, 2019)).

         I. The charge is not a tax

         The utilities argue that franchise compensation is an unauthorized and therefore unlawful tax. But courts have consistently rejected similar arguments, instead characterizing charges like the franchise compensation at issue here as charges in the nature of rent. E.g., City of St. Louis v. W. Union Tel. Co., 148 U.S. 92, 97, 13 S.Ct. 485, 37 L.Ed. 380 (1893); cf. Jacks v. City of Santa Barbara, 3 Cal. 5th 248');">3 Cal. 5th 248, 262, 267, 397 P.3d 210, 219 Cal.Rptr.3d 859 (2017) (explaining that franchise fees are not taxes but are the cost of purchasing a property right). In Western Union Telegraph, for example, the city of St. Louis tried to charge telegraph and telephone companies $5 per year for each pole located on city property, including streets. 148 U.S. at 93-94. The trial court held that the charge was an unauthorized tax. Id. at 95-96. The United States Supreme Court reversed, holding that the charge was "in the nature of a charge for the use of property belonging to the city-that which may properly be called rental." Id. at 97. The Supreme Court explained that the charge was no different than if the city had rented out the rooms of city hall. Id.

         We have fully endorsed that view. E.g., Burns, 161 Wn.2d at 144 ("A franchise fee is 'in the nature of rental for the use and occupation of the streets.'" (quoting Spokane Gas & Fuel, 175 Wash, at 108)); Pac. Tel. & Tel. Co. v. City of Everett, 97 Wash. 259, 267-68, 166 P. 650 (1917) (quoting favorably from W. Union Tel, 148 U.S. 92). In Spokane Gas & Fuel, for example, the city of Spokane granted a franchise to a gas company for the use of city streets to distribute gas. 175 Wash, at 104. In exchange for the right to use city streets, the city of Spokane charged the company two percent of its gross receipts from the sale of gas. Id. at 104-05. We explained that "[a] charge imposed in a franchise is not a tax or a license." Id. at 108-09. Instead, the charge at issue was "in the nature of a rental. . . pursuant to the terms of a contract." Id. at 109.

         In any event, whether franchise compensation is akin to rent does not matter. All that matters is that whatever it is, it is not a tax. To argue that it is a tax, the utilities rely on two cases, one from our court and one from the Court of Appeals. Dists.' Resp. Br. at 17-20 (discussing Covell v. City of Seattle,127 Wn.2d 874, 905 P.2d 324 (1995), overruled in part on other grounds by Chong Yim, No. 96817-9; Lakewood,106 Wn.App. 63); Br. of Intervenor-Resp'ts at 30-31, 47-48 ...

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