Certiorari Denied, No. 31,884, September 10, 2009
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number: 2009-NMCA-117
Filing Date: July 23, 2009
Docket No. 26,386
MOONGATE WATER COMPANY INC.,
a New Mexico public utility,
Plaintiff-Appellee,
v.
CITY OF LAS CRUCES,
Defendant-Appellant.
APPEAL FROM THE DISTRICT COURT OF DOÑA ANA COUNTY
Robert E. Robles, District Judge
William H. Lazar
Tesuque, NM
Kyle W. Gesswein
Las Cruces, NM
for Appellee
Rodey, Dickason, Sloan, Akin & Robb, P.A.
Edward Ricco
Albuquerque, NM
Office of the City Attorney
Harry S. “Pete” Connelly
Marcia B. Driggers
Las Cruces, NM
Martin, Lutz, Roggow, Hosford & Eubanks, P.C.
William L. Lutz
Las Cruces, NM
1
for Appellant
OPINION
FRY, Chief Judge.
{1} The opinion filed in this case on June 19, 2009, is hereby withdrawn, and the
following opinion is filed in its place. The motion for rehearing is denied.
{2} This case arises from a dispute between the City of Las Cruces and Moongate Water
Company over the right to supply water in a disputed area within the City’s territorial limits.
The district court granted summary judgment in favor of Moongate on Moongate’s theory
that it is a third-party beneficiary of a settlement agreement entered into by the City and
Doña Ana Mutual Domestic Water Consumers Association (Doña Ana) to resolve an earlier
lawsuit between those parties and that the settlement agreement constitutes an enforceable
promise by the City to refrain from serving the area in dispute in this case. Consequently,
the district court declared that the City is contractually prohibited from providing water
service in the disputed area. The district court also declared that Moongate’s utility
franchise with the City expired and is of no effect and that Moongate is not required to have
a franchise from the City in order to continue serving its customers within the City.
Moongate had sought this declaration in order to continue to provide water service to its
customers without the burden of the terms and conditions of the franchise agreement. The
City appealed, arguing that the franchise should continue as an implied contract as long as
the parties continue to operate as they did when the franchise was in effect. We agree, and
for the following reasons we hold that the franchise between Moongate and the City
remained in effect beyond its expiration as an implied contract.
BACKGROUND
{3} In 1988, the City granted a franchise to Moongate allowing Moongate to operate a
water distribution system. The franchise gave Moongate the right to lay its pipes and other
distribution equipment on public land and delineated Moongate’s obligations to avoid
interfering with public ways when placing its equipment. The franchise gave detailed
instructions regarding Moongate’s obligations to obtain permits, consult with the City’s
utility director, repair any damage to municipal property caused by its excavations, and
restore public ways to their original condition. In addition, the franchise authorized the City
to require Moongate to move its equipment under certain circumstances and required
Moongate to pay a yearly franchise fee based on the number of customers it served. The
franchise expired on December 31, 2002.
{4} Prior to the franchise’s expiration, the City notified Moongate that due to the
uncertainty over Moongate’s service area caused by litigation between the City and Doña
Ana, and due to uncertainty regarding changes that the Legislature intended to make to the
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Public Utility Act (PUA), NMSA 1978, §§ 62-3-1 to -5 (1967, as amended through 2008),
in 2003, it would delay negotiating a new franchise until the litigation had been resolved and
the PUA had been amended. The City noted that the expired franchise would continue on
a month-to-month basis until a new franchise could be drafted.
{5} During the litigation over the third-party beneficiary issue, Moongate contended that
the franchise had terminated in 2002 and that there was no longer a franchise agreement
governing its relationship with the City. In response to this assertion, the City argued that
if Moongate did not have a franchise, Moongate could not continue using the City’s property
to operate its water distribution system. Moongate then filed a motion for a declaratory
judgment that the franchise had expired and that it had a right to provide water using City
property without a franchise. The district court agreed with Moongate and granted partial
summary judgment in favor of Moongate, ruling that Moongate’s “franchise has expired and
is of no force and effect” and that Moongate “is not required to have a franchise from the
City . . . to serve water customers within the City.”
DISCUSSION
Standard of Review
{6} On appeal from summary judgment, we review the whole record in the light most
favorable to the party opposing summary judgment to determine if there is any evidence that
places a genuine issue of material fact in dispute. Rummel v. Lexington Ins. Co., 1997-
NMSC-041, ¶ 15, 123 N.M. 752, 945 P.2d 970; Hamburg v. Sandia Corp., 2007-NMCA-
078, ¶ 6, 142 N.M. 72, 162 P.3d 909. If no material issues of fact are in dispute and an
appeal presents only a question of law, we do not review in the light most favorable to the
party opposing the motion, and we apply de novo review. Rutherford v. Chaves County,
2003-NMSC-010, ¶ 8, 133 N.M. 756, 69 P.3d 1199. Here, neither party argues that any
material issues of fact are in dispute, and resolution of this appeal depends solely on whether
an expired franchise continues by operation of law under implied terms after its expiration.
Thus, this appeal presents a question of law that we review de novo.
Moongate’s Franchise Claim Is Justiciable
{7} The City first argues that the question of whether the franchise continued after its
expiration is not justiciable because there is not a “concrete controversy between the parties”
and that Moongate’s motion for partial summary judgment on the franchise issue therefore
“amounted to [nothing] more than a request for an advisory opinion.”
{8} The district court’s jurisdiction in a declaratory action is limited to cases of actual
controversy. State ex rel. Stratton v. Roswell Indep. Sch., 111 N.M. 495, 507, 806 P.2d
1085, 1097 (Ct. App. 1991). A case presents an actual controversy “if the question posed
to the court is real and not theoretical, the person raising it has a real interest in the question,
and there is another person having a real interest in the question who may oppose the
declaration sought.” Id. The decision whether to assume jurisdiction in a declaratory
judgment action is within the district court’s discretionary power and is therefore reviewed
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for an abuse of discretion. Allstate Ins. Co. v. Firemen’s Ins. Co., 76 N.M. 430, 433, 415
P.2d 553, 555 (1966).
{9} We cannot conclude that the district court abused its discretion when it determined
that it had jurisdiction to resolve Moongate’s request for a declaratory judgment. Here, the
franchise between the City and Moongate had expired, and no new franchise had been
negotiated. The City argued that the franchise remained in effect past its expiration date, but
Moongate contended that it was no longer bound by the terms of the franchise. Thus, there
was a real question as to whether the expired franchise continued to remain in effect past its
expiration, Moongate had a real interest in determining whether it was bound by a franchise
agreement, and the City had a real interest in determining whether the franchise had
continued beyond its expiration such that it could oppose Moongate’s motion. Therefore,
the district court did not abuse its discretion in ruling on Moongate’s motion for declaratory
judgment.
An Expired Utility Franchise Continues Under Implied Terms After Its Expiration
{10} It is undisputed that the franchise between Moongate and the City expired by its
terms on December 21, 2002. Moongate argues that upon the expiration of the franchise,
it was relieved of all of its obligations under the franchise and that the franchise ceased to
have any effect on its relationship with the City.
{11} Whether a public utility franchise continues past its expiration is a matter of first
impression in New Mexico. Ordinarily, a public utility ceases to have any contractual
relationship with a municipality upon the expiration of a franchise. See 12 Eugene
McQuillin, The Law of Municipal Corporations § 34:69, at 256 (2006). However, if “the
parties to a franchise agreement continue to perform after the expiration of the franchise in
the same manner they did when the franchise was formally in effect,” then the public utility
operates “under an implied contract, cancelable upon reasonable notice, under the same
terms and conditions as the franchise ordinance.” Id. The rationale behind this rule is that
“a public utility may not continue to reap the benefits of a franchise agreement after its
expiration and be relieved of the burdens of the same agreement.” Id. at 257.
{12} This general rule has been adopted by a number of jurisdictions that have considered
the question. The Tenth Circuit, in City of Roswell v. Mountain States Telephone &
Telegraph Co., 78 F.2d 379, 386 (10th Cir. 1935), noted that while a municipality’s
continued acceptance of telephone services past the expiration of a franchise did “not vest
the [utility] with a perpetual right in the streets and alleys,” the continued use and provision
of services did “constitute an implied agreement of indefinite duration, terminable within a
reasonable time after their acceptance has ceased.” Other jurisdictions have reached the
same result. The Kansas Supreme Court, for example, applied this rule in Baker v. City of
Topeka, 644 P.2d 441, 445 (Kan. 1982), concluding that the utility “could [not] continue to
reap the benefits of the [franchise] after its expiration . . . yet be relieved of the burdens of
the same agreement.” See also, e.g., Village of Lapwai v. Alligier, 207 P.2d 1025, 1027
(Idaho 1949) (adopting rule that a water company that continues to supply water after
expiration of the franchise is bound by an implied contract); Inc. Town of Pittsburg v.
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Cochrane, 159 P.2d 534, 538 (Okla. 1945) (noting that the expired franchise continues under
implied terms and is cancelable upon reasonable notice); City of Richmond v. Chesapeake
& Potomac Tel. Co., 140 S.E.2d 683, 686 (Va. 1965) (noting that the expired franchise
continues under implied terms). In Baker, the court reasoned that “the parties by their
actions and performance continued the terms of the [expired] agreement past the expiration
date.” 644 P.2d at 445.
{13} Moongate argues that this general rule should not apply in New Mexico. Moongate
makes only one argument with any direct bearing on this question, which is that the
applicable statute requires a franchise to be granted by ordinance and any implied
continuation of a franchise would therefore violate the statutory requirement. See NMSA
1978, § 3-42-1(A) (1965). We disagree. Although Moongate is correct that Section 3-42-1
requires a franchise to be granted by ordinance, Moongate misconstrues the effect of an
implied continuation of an expired franchise. While Section 3-42-1 requires a municipality
to pass an ordinance to grant a franchise, the continuation of an existing franchise beyond
its expiration is not the grant of a franchise. Instead, after a franchise expires, it is continued
by operation of law as an implied contract as long as the public utility continues to provide
utility services. Thus, it is not a new franchise that continues to govern the relationship
between the parties after a franchise expires. Instead, it is the same franchise that had
governed the parties’ relationship prior to its expiration—a franchise that was granted by
ordinance in accordance with Section 3-42-1(A)—that continues to govern the relationship
under the same terms, as long as the utility continues to provide service and until the parties
negotiate a new franchise. Thus, the requirement of Section 3-42-1 that a franchise be
granted by ordinance is not violated by the continuation of an expired franchise.
{14} Moongate makes three additional arguments supporting its position that a franchise
cannot continue under implied terms, but all of these arguments revolve around whether a
franchise is even necessary for Moongate’s continued operation. First, Moongate contends
that an implied franchise is unnecessary because “municipalities have independent statutory
authority . . . to address strictly local issues pertaining to public utilities” such that a
“franchise is unnecessary to give a municipality that authority.” Even in the absence of a
franchise, Moongate argues, the City can validly exercise its police power to impose
regulations on public utilities and even require relocation of a utility’s structures as long as
the City’s exercise of the power does not contravene public policy. See City of Albuquerque
v. N.M. Pub. Regulation Comm’n, 2003-NMSC-028, ¶¶ 6-7, 134 N.M. 472, 79 P.3d 297
(noting that a municipality can require a utility to relocate at the utility’s expense if in the
interest of public health and safety subject only to limitations imposed by the Legislature).
Second, Moongate argues that once it received a certificate of public necessity and
convenience from the Public Regulatory Commission (PRC), it no longer required a
franchise to continue its operation within the City and that it is in fact now obligated to
provide service regardless of whether the City is willing to grant a franchise. Third,
Moongate argues that it receives no benefit from a franchise, contending that the purpose of
a franchise is primarily fiscal, not regulatory, and that “the municipality alone benefits from
a franchise.” In making this assertion, Moongate appears to be arguing that a franchise is
unnecessary in that Moongate, as a regulated public utility with a certificate of convenience
and necessity, does not require a franchise in order to continue its operations within the
5
municipality, and thus a franchise only benefits the City. All three of Moongate’s arguments
suggest that a franchise is an unnecessary element of its relationship with the City, and
Moongate appears to be arguing that because a franchise is unnecessary, a franchise cannot
continue under implied terms. We disagree.
{15} Moongate misconstrues the importance of a franchise. Section 3-42-1(A) provides
that “[a] municipality may grant, by ordinance, a franchise to any person, firm or corporation
for the construction and operation of any public utility.” (Emphasis added.) Because other
statutory provisions provide that a municipality shall grant a franchise under certain
circumstances, Moongate contends that a franchise is optional if it is not required by one of
these mandatory statutory provisions. This argument is without merit. A municipality is
required to grant a franchise to a utility that has been granted a franchise by a board of
county commissioners prior to the municipality’s incorporation, and to a utility that is
determined by the PRC to have a right to serve newly annexed territory if more than one
utility claimed the right to provide service to the area. NMSA 1978, Section 3-42-2(A)
(1965) (stating that “the governing body shall, without a vote by the electorate” grant a
franchise “[i]f previous to the incorporation of a municipality, the board of county
commissioners has granted” a franchise); NMSA 1978, § 3-7-2 (1993) (“The municipality
shall grant a franchise to the utility that is to serve the territory annexed.”). In all other
situations, whether a municipality grants a franchise to a public utility is at the discretion of
the municipality. See § 3-7-2. Section 3-7-2 does not, as Moongate contends, indicate that
a franchise is not necessary in order for a public utility to use municipal rights-of-way.
{16} In fact, a utility cannot begin constructing its utility lines or providing services until
it receives a franchise from a municipality and obtains a certificate of convenience and
necessity from the PRC. NMSA 1978, § 62-9-6 (1967) (stating that a utility must show that
it “has received the consent and franchise from the municipality wherein construction and
operation is proposed” before it can obtain a certificate of convenience and necessity); City
of Albuquerque v. N.M. Pub. Serv. Comm’n, 115 N.M. 521, 529 n.9, 854 P.2d 348, 356 n.9
(1993) (noting that Section 3-42-1(A) “does not empower municipalities to authorize public
utilities to render service to municipal inhabitants” because “such authority resides
exclusively with the [PRC]”). Without a franchise, a public utility is unable to construct its
service lines or provide services to its customers, and thus, a franchise is an absolutely
essential element of the relationship between a municipality and a public utility.
{17} Moongate argues, however, that once the certificate of necessity and convenience is
granted by the PRC, a franchise is no longer necessary because a public utility is free to
“condemn public property for rights of way” and the municipality’s authorization to use
public property is no longer necessary. In support of this argument, Moongate notes that
NMSA 1978, Section 62-2-16 (1981) provides water utilities formed under NMSA 1978,
Section 62-2-1 (1887) with “the power of eminent domain . . . in the manner provided by the
Eminent Domain Code.” Section 62-2-16.
{18} While we acknowledge that Section 62-2-16 grants the power of eminent domain to
a water utility, we disagree with Moongate’s contention that the existence of this power
makes a franchise unnecessary. According to Section 62-2-16, a water utility’s power of
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eminent domain can only be carried out in the manner provided by the Eminent Domain
Code, NMSA Section 42A-1-1 to -34 (1980, as amended through 2001). In order to bring
about a condemnation action under the Eminent Domain Code, the condemnor must first
attempt to negotiate the sale of the property, obtain an appraisal of the property, and may be
required to post a surety bond in the amount that would constitute just compensation.
Sections 42A-1-4, -5, -10. Once a condemnation action is filed, assuming that the
condemnor is successful, the condemnor must then pay the condemnee just compensation
for the taking of the property. Section 42A-1-24.
{19} While a condemnation proceeding allows a utility to obtain property through an
expensive and contentious proceeding, a franchise, in contrast, allows a utility to use public
property with the permission of the municipality upon terms agreed to by both parties. City
of Albuquerque, 115 N.M. at 553, 854 P.2d at 360 (noting that the primary purpose of a
franchise is to “entitle[] the utility to use the municipality’s streets and rights[-]of[-]way to
construct and operate its facilities and distribution system”). Because the utility franchise
allows Moongate to use City rights-of-way with the permission of the City, and thus without
resorting to condemnation, the franchise plays a vital role in the relationship between the
parties. Thus, the mere fact that Moongate may have another method to obtain the property
it needs to provide its services does not, as Moongate argues, indicate that a franchise is
unnecessary. Instead, the franchise allows Moongate to use City land without the necessity
of condemnation.
{20} Moongate next argues that a franchise is unnecessary because the majority of the
obligations imposed on a public utility and most of the power a municipality has over a
public utility exist independently of a franchise agreement. In support of this argument,
Moongate notes that the City may use its police powers to regulate its streets pursuant to
NMSA 1978, Section 3-18-17(B) (2008) (amended 2009), may regulate its structures
pursuant to NMSA 1978, Section 3-49-1(A) (1967), may prevent utilities from interfering
with public travel pursuant to Section 62-1-3, and may impose regulations upon the
operation of public utilities within municipality limits pursuant to NMSA 1978, Section 62-
1-2 (1909) and Section 62-2-21, as long as the City acts in accordance with public policy.
We are not persuaded. The fact that some of the obligations and duties imposed by a
franchise agreement exist independently of the franchise does not indicate that a franchise
is unnecessary for the continued relationship between a utility and a municipality or that a
franchise cannot continue beyond its expiration date when a public utility continues to
provide services.
{21} While a franchise sets out a public utility’s obligations to avoid interfering with
public travel and to repair any public streets damaged by the utility’s operations, the primary
purpose of a franchise is to “entitle[] [a] utility to use the municipality’s streets and rights[-
]of[-]way to construct and operate its facilities and distribution system.” City of
Albuquerque, 115 N.M. at 533, 854 P.2d at 360. Thus, contrary to Moongate’s argument,
a franchise has a distinct and important purpose—granting a utility the right-of-way to use
public property—that is not a part of the general police power of the City. See City of
Roswell, 78 F.2d at 383-84 (noting that “[t]he term franchise usually means a grant of the
right to use highways, streets and alleys,” which is distinctly different from the police power
7
a municipality can utilize). Further, while Moongate argues that Section 62-2-13 allows the
City to impose regulations on Moongate, Moongate fails to recognize that the method by
which a municipality imposes such regulations is through a franchise. A franchise is
therefore a necessary element in the relationship between Moongate and the City because
the franchise alone gives Moongate permission to use City property under the terms imposed
by the City and delineates the specific obligations both parties must abide by.
{22} We also reject Moongate’s argument that a franchise is unnecessary because it is
“primarily fiscal, not regulatory” and that the “municipality alone benefits from [the]
franchise . . . [and] has an incentive to renew a franchise when it expires.” As we have
explained above, a franchise is a necessary and essential element of the relationship between
a public utility and a municipality that benefits both parties by delineating the scope of the
relationship between a utility and a municipality. While it is true that only the City can
collect a franchise fee, Moongate mischaracterizes this fact as indicating that only the City
benefits from the franchise. A public utility benefits from a franchise by being given a right-
of-way on public lands to provide service to its customers. Moongate’s franchise with the
City allows it to avoid having to go through the process of condemning the rights-of-way it
currently uses and paying the City the full value of the taken property. Thus, contrary to
Moongate’s argument, both the City and Moongate receive a fiscal benefit from the
existence of a franchise.
{23} Because we conclude that a franchise is necessary for the continued operation of
Moongate’s utility, we necessarily reject Moongate’s argument that because a franchise is
unnecessary, an expired franchise cannot continue as an implied contract. Apart from its
argument that a franchise is unnecessary, Moongate has presented us with no authority for
rejecting the general rule that an expired public utility franchise continues under implied
terms as long as both parties to the franchise continue to operate as they did prior to the
franchise’s expiration. Because we find the federal and out-of-state authority setting out this
general rule persuasive, we hold that when Moongate’s franchise with the City expired, the
franchise continued as an implied contract under the same terms and conditions as the
expired franchise because it is undisputed that Moongate continued to operate its utility.
{24} Finally, Moongate argues that even if the expired franchise continues under implied
terms, the City cannot cancel the franchise and force Moongate to remove its service lines
and stop providing service to its customers. This is because, Moongate contends, the PRC
must approve the abandonment of a public utility’s facilities and the cessation of utility
services. We need not address this contention because there is nothing in the record
suggesting that the City is intending to cancel the franchise or force Moongate to stop
providing service to its customers. Moongate’s argument is therefore merely a hypothetical
supposition of what might occur at some point in the future. See State ex rel. Stratton, 111
N.M. at 507, 806 P.2d at 1097 (requiring the question posed to the appellate court to be real
and not theoretical).
An Expired Franchise Cannot Continue Under Implied Terms for More Than Twenty-
Five Years From the Effective Date of the Original Franchise
8
{25} Moongate finally argues that the continuation of an expired franchise on implied
terms could impose an indefinite burden upon its customers. We disagree. Section 3-42-
1(F) provides that “[n]o franchise ordinance shall be in effect for more than twenty-five
years.” Thus, while we hold that a franchise agreement remains in effect after its expiration,
our holding must be viewed in light of Section 3-42-1(F). The record shows that
Moongate’s franchise was adopted by the City on July 18, 1988, and went into effect
sometime shortly thereafter. Thus, consistent with our holding and the limitations imposed
by Section 3-42-1(F), the franchise remains in effect under implied terms until the parties
negotiate a new franchise agreement, until they cancel the existing implied contract, or until
twenty-five years after the franchise first went into effect.
Third-Party Beneficiary
{26} The City’s appeal initially presented a second question of whether Moongate was a
third-party beneficiary of the contract between the City and Doña Ana. At the request of the
parties, we stayed this appeal pending resolution of the third-party beneficiary issue in a
related proceeding in the Tenth Circuit Court of Appeals. The parties stipulated that
if the Tenth Circuit reverses and directs entry of summary judgment for the
City on the third-party beneficiary issue, Moongate agrees that in the present
appeal this Court may not only reverse but may direct entry of summary
judgment for the City on the third-party beneficiary issue on remand to the
state district court.
{27} In Doña Ana Mutual Domestic Water Consumers Association v. City of Las Cruces,
516 F.3d 900 (10th Cir. 2008), the Tenth Circuit held that Moongate was not a third-party
beneficiary of the contract. Pursuant to the parties’ stipulation, we reverse the district court’s
grant of summary judgment in favor of Moongate on the third-party beneficiary issue and
remand to the district court with directions to grant summary judgment in favor of the City
on that issue.
CONCLUSION
{28} For the foregoing reasons, we reverse the district court’s grant of summary judgment
in favor of Moongate. We remand to the district court with instructions to enter summary
judgment in favor of the City on (1) the issue of Moongate’s third-party beneficiary status,
and (2) the existence of the franchise between Moongate and the City.
{29} IT IS SO ORDERED.
_____________________________________
CYNTHIA A. FRY, Chief Judge
WE CONCUR:
____________________________________
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JONATHAN B. SUTIN, Judge
____________________________________
MICHAEL E. VIGIL, Judge
Topic Index for Moongate Water Co. Inc. v. City of Las Cruces, No. 26,386
AE APPEAL AND ERROR
AE-SR Standard of Review
CN CONTRACTS
CN-IC Implied Contract
CN-TB Third Party Beneficiary
CP CIVIL PROCEDURE
CP-SE Settlement Agreement
CP-SJ Summary Judgment
CP- TA Third-party Actions
GV GOVERNMENT
GV-MU Municipalities
GV-WS Water and Waste Systems
JM JUDGMENT
JM-DJ Declaratory Judgment
PR PROPERTY
PR-CD Condemnation
PU PUBLIC UTILITIES AND COMMUNICATIONS
PU-PU Public Utilities, General
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