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The high cost of water is based on the amount of gallons used and includes the energy to pump it to residential homes.

When most Billings residents get their water bill for July, they may notice a slight increase.

Sure, more water is consumed during these hot summer days. 

But actually, the water rates for most residents will go down and up simultaneously, resulting in a slight net increase. That's because the Billings City Council has approved a budget without franchise fees for water and waste disposal — a contentious issue among residents. Abandoning the franchise fee, however, meant the city had a budgetary hole to fill, and it saw raising rates as one of the few means available.

An in-depth look by The Billings Gazette into the possible class-action suit shows that a group of residents had been lobbying the council for nearly a year to drop the controversial fee assessment, asserting that it was an illegal sales tax. And it was likely because of these residents that the city relented and abandoned the long-standing fees.

The residents also insist the city's stall tactics left them with few choices but to try a class-action suit, and they worry without a promise from the city franchise fees may come back.

Meanwhile, the city has filed paperwork suggesting no sitting judge in Yellowstone County can hear a class-action suit because all the judges are ratepayers to the City of Billings.

While the city has yet to file an official response to the group of residents who filed the potential class-action suit, there have been plenty of discussions and correspondence The Gazette has obtained through public document requests. 

Franchise fee dispute

Franchise fees are charges imposed on ratepayers of a utility, usually for access to property or public rights-of-way. For example, cable television companies are often charged franchise fees for running lines along and through public property. Those fees are passed through to customers on their bills. The logic behind the fee goes something like this: Utility companies have the benefit of the public rights-of-way, and those are kept in place by government, so companies shouldn't get the service for free when, if they had been forced to acquire access to lands, it would cost a substantial amount.

Experts say franchise fees are a way for the city to recoup money on the public's behalf for letting private companies use what is essentially public property.

But in the lawsuit residents filed against the city as a possible class-action suit (the case would have to be certified by Judge Mary Jane Knisley), they claim that for years the city has charged every ratepayer every month a fee and the ratepayers have gotten virtually nothing in return. The lawsuit claims franchise fees were used as a way to pad the city's general fund, and not as a way to improve the waste or water systems. Because of that, the court filings and correspondence say, the franchise fees were nothing more than a sales tax.

The six residents — Terry Houser, Terry Odegard, Roger Webb, Mae Woo, and Kathryn and Tom Zurbuchen — began the process nearly a year ago. Attorneys Kristen Juras and Matthew Monforton represent the residents. They said the city was given plenty of notice about the potential suit but dragged its heels, leaving the residents no other option but to file.

The city for its part hired the law firm Moulton Bellingham, and then-attorney Jessica Fehr represented the city. But Fehr was appointed to an open bench slot created when Russ Fagg ran for the U.S. Senate. 

"We've been talking since August. There was delay after delay and finally our clients said, 'Enough is enough,'" Monforton said. 

Once that happened, the group said, any negotiations and conversation with the city seemed to cease.

"The city said if you're going to file a lawsuit, then we're not interested in settlement," Juras said.

Billings City Administrator Bruce McCandless told The Gazette the city was negotiating, but the residents' demands had changed. He agreed the dynamics of the conversation changed when the lawsuit was filed.

"I don't think we said we were not willing to talk, but when you file a lawsuit, it makes it more difficult to talk," McCandless said. 

Months of back-and-forth conversations outline the residents' concerns, including that the franchise fees did not give residents any special rights, nor did it go to improving the water or sewer systems. Furthermore, the city has charged the utilities, for example, the water department, for fees without ever reimbursing it for the services they provided back to the city.

Juras points out in 2018, unreimbursed water, sewer and garbage rates for the city were more than $1 million. Notably, the city does not charge itself for water it uses at one of its 47 parks with more than 3,000 acres.

Juras also points out that the unreimbursed toll for water caused the council to raise water rates in 2016 by 3 percent to offset the loss.

Meanwhile, the franchise fees collected from residents did not go back to improve the city's water and sewer service. Instead, it went to the general fund, something not necessarily allowed, the correspondence argues.

"Franchise fees are used to fund general administration, public safety operations, public financing and park maintenance," Juras wrote in a letter to the city's attorneys in November 2017.

Though lawyers for the city have consistently said the franchise fees were legal, the city council as part of its budgeting process decided not to include them in the budget as part of its Fiscal Year 2019 plan, marking the first time since 1992 a franchise fee of some sort didn't appear on residents' bills.

The city says the timing wasn't coincidental, and related to the residents' concerns.

"Through their attorneys and understanding the budget process, they asked if we were going to change or reconsider it," McCandless said. "We talked to the city council and it advised us that we should prepare the budget for (20)19 without the (franchise fee) revenue.

"Yes, they're related."

Juras said the residents are also pushing forward with the lawsuit because the city has a history of ignoring the law and foisting taxes on residents. She cited three other cases in which courts found Billings had imposed fees.

One case, Montana Innkeepers Association vs. Billings, struck down a sales tax of $1 per person per day imposed on Billings hotels. Also, in 1986, the city implemented a business licensing fee based on revenue. Finally, a 2003 case, Montana Dakota Utilities v. Billings, ruled against the city's use of franchise fees.

"Yet here we are once again because of the city's stubborn refusal to heed three prior Supreme Court decisions," Juras said.

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Because the franchise fees went directly to the city's general fund, it's hard to say exactly how much has been collected in the past 15 years, but lawyers estimate it's in excess of $14 million. According to court filings, if residents are successful in a lawsuit, it would mean approximately $3.15 per month on average.

Juras believes that may explain why the city continued to charge the fees for so long — because the damages were so small that hiring an attorney would not have been reasonable.

"No individual would pay for a lawsuit for that," Juras said.

All judges could have a conflict

The city, through its attorney, last week filed a report to the court, advising it that all judges in Yellowstone County were members of the class-action lawsuit as ratepayers of the city's utilities.

"Accordingly, all of the judges in Yellowstone County may have a potential conflict of interest in this case," said the city's new attorney, Doug James.

It's unclear if any of the current judges would invoke a conflict, Juras said. Montana law remains largely silent on judges as members of a class action suit, especially when they're involuntary members. That means most residents in city limits do not have a choice of utility services for basic services like water, so therefore must rely on the city, but not necessarily by choice.

Juras said while Montana law doesn't speak to a potential conflict, federal law does, and judges have options ranging from disclosing they're a member of the class before a trial starts to renouncing any monetary benefit they could get.

"Procedurally, we don't think this was appropriate," Juras said.

While it could be construed as a move to get all Yellowstone County judges disqualified, Juras said it wouldn't stop the suit — a judge from a nearby district would likely be assigned the case.

McCandless said he would not comment if the city believed the judges should recuse themselves.

"The plaintiffs still want to settle this without wasting considerable time and resources of the court," Juras said.

Included in the correspondence to the city was a proposal for settlement that included permanently eliminating the franchise fee and attorneys fees for the residents in exchange for dropping the suit.

Juras said the city has already sent her clients a 28-page discovery letter before it has even filed a response to the class-action claim. 

"I would say that's not usually how it's done," Juras said.

The city has until Tuesday, June 19, to file its response. 

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Editor

Darrell Ehrlick is editor of The Billings Gazette.