July 23, 2009 – Moongate Water Company, Inc. v. City of Las Cruces, No. 26,386

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IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number:

Filing Date: JULY 23, 2009

NO. 26,386

MOONGATE WATER COMPANY INC.,
a New Mexico public utility,

Plaintiff-A ppellee,

V.

CITY OF LAS CRUCES,
Defendant: A ppellant.

APPEAL FROM THE DISTRICT COURT OF DONA 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
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{1} 	The opinion filed in this case on June 19, 2009, is hereby withdrawn, and the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

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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 Public Utility Act (PUA), NMSA 1978, §§ 62-3-1 to -5 (1967, as

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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

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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

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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 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.

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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

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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. 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

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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.

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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

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require a franchise in order to continue its operations within the 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

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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

12
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 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

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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

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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 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

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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

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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

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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
{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

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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:

JONATHANB. SUTIN, Judge

MICHAEL E. VIGIL, Judge

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