Allco Fin. Ltd. v. Klee

• Decision Date: 18 August 2016
• Docket Number: Civil Action No. 3:16-cv-508 (CSH),Civil Action No. 3:15-cv-608 (CSH)
• Court: United States District Courts. 2nd Circuit. United States District Court (Connecticut)
• Parties: ALLCO FINANCE LIMITED, Plaintiff, v. ROBERT KLEE, in his Official Capacity as Commissioner of the CONNECTICUT DEPARTMENT OF ENERGY AND ENVIRONMENTAL PROTECTION, and ARTHUR HOUSE, JOHN W. BETKOSKI, III and MICHAEL CARON, in their Official Capacities as Commissioners of the CONNECTICUT PUBLIC UTILITIES REGULATORY AUTHORITY, Defendants

ALLCO FINANCE LIMITED, Plaintiff, v. ROBERT KLEE, in his Official Capacity as Commissioner of theCONNECTICUT DEPARTMENT OF ENERGY AND ENVIRONMENTAL PROTECTION,and ARTHUR HOUSE, JOHN W. BETKOSKI, III and MICHAEL CARON,in their Official Capacities as Commissioners of the CONNECTICUTPUBLIC UTILITIES REGULATORY AUTHORITY, Defendants

Civil Action No. 3:15-cv-608 (CSH)

Civil Action No. 3:16-cv-508 (CSH)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT

AUGUST 18, 2016

(related cases with identical parties)

OMNIBUS RULING IN RELATED CASES ON MOTIONS TO DISMISS COMPLAINTS AND FOR PRELIMINARY INJUNCTIVE RELIEF

HAIGHT, Senior District Judge:

This ruling concerns two cases, each entitled Allco v. Klee, et al., which bear docket numbers 3:15-cv-608 and 3:16-cv-508. These two cases, related but not formally consolidated, center on the State of Connecticut's implementation of a 2013 state statute that empowered the Commissioner of Connecticut's Department of Energy and Environmental Protection to solicit proposals for renewable energy, select winners of the solicitation, and direct Connecticut's utilities to enter into wholesale energy contracts with the chosen winners. Additionally, 3:15-cv-608 also concerns a statute which requires energy utilities to buy renewable energy credits or produce renewable energy themselves in order to sell energy in the State of Connecticut.

Plaintiff Allco Finance Limited ("Allco"), a generator of renewable electrical energy, has filed two actions in this Court against Connecticut State industry regulators. Plaintiff Allco contends in each action that the state statutory scheme is precluded by or violates federal energy statutes, and that Connecticut's implementation of its statute has damaged plaintiff. In each action, the same Defendants, who are the Connecticut State regulators, move to dismiss the complaint. Plaintiff opposes Defendants' motions to dismiss, and for its part, moves for preliminary injunctive relief in each case, which Defendants oppose.

In consequence, these two cases, viewed together, currently present for the Court's consideration two motions to dismiss and two motions for preliminary injunctive relief. The parties and the issues are largely the same. The motions have been elaborately briefed by able counsel. The Court heard oral argument. This Omnibus Ruling decides all four motions.

I.

A.

The discovery of fire was a significant event, creating for mankind warmth against the cold and light in the darkness. We do not know which man or woman first noticed that a burning bundle of sticks produced those useful results of warmth and light, which in modern times are the products of alternative forms of energy. Electrical energy is one of these. The concept of electricity was first deduced by William Gilbert, a physician in the service of Elizabeth I of England (1533-1603). In 1752, Benjamin Franklin demonstrated the practical application of electricity by flying a kite carrying a key into a lightening storm. Today, electricity is a principal source of light and heat for the world and its people.

As the importance of electricity has increased exponentially in human affairs, politicians and governments inevitably stepped up regulation of the generation and marketing of electrical energy. In the United States, responsibility for the electrical energy industry is divided between the federal Congress and the state legislatures. "In the early 20^th century, state and local agencies oversaw nearly all generation, transmission, and distribution of electricity." FERC v. Electric Power Supply Association, 136 S. Ct. 760, 767 (2016) ("EPSA""). When, in 1927, the Supreme Court held that the Commerce Clause barred the States from regulating interstate aspects of electricity transactions, see Public Util. Comm'n of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 89-90 (1927), a void in the federal regulatory scheme was exposed, whichCongress filled in 1935 by enacting the Federal Power Act, 16 U.S.C. § 791a et seq. ("FPA" or "the Act"). The Act fashioned that federal-state division of legislative regulatory responsibility that underlies and gives rise to the cases at bar.

Created in 1973, the Federal Energy Regulatory Commission ("FERC") has exclusive authority to regulate "the sale of electric energy at wholesale in interstate commerce." 16 U.S.C. § 824(b)(1). A wholesale sale is defined as a "sale of electric energy to any person for resale." 16 U.S.C. § 824(d). "But the law places beyond FERC's power, and leaves to the States alone, the regulation of 'any other sale' - most notably, any retail sale - of electricity." Hughes v. Talen Energy Marketing, LLC, 136 S. Ct. 1288, 1292 (2016) (quoting EPSA, 136 S.Ct. at 762). "The States' reserved authority includes control over in-state 'facilities used for the generation of electrical energy.'" Id. (quoting 16 U.S.C. § 824(b)). "Alongside those grants of power, however, the Act also limits FERC's regulatory reach, and thereby maintains a zone of exclusive state jurisdiction. . . . Accordingly, the Commission may not regulate either within-state wholesale sales, or more important here, retail sales of electricity (i.e., sales directly to users). State utility commissions continue to oversee those transactions." EPSA, 136 S.Ct. at 767-768 (citation omitted).

Under the FPA, FERC "has authority to regulate 'the transmission of electric energy in interstate commerce' and 'the sale of electric energy at wholesale in interstate commerce.'" Id. at 767 (quoting 16 U.S.C. § 824(b)(1)). The FPA obligates FERC "to oversee all prices for those interstate transactions and all rules and practices affecting such prices," and further provides that "all rates and charges made, demanded or received by any public utility for or in connection with" interstate transmissions or wholesale sales must be "just and reasonable." Id. (quoting 16 U.S.C. § 824d(a)). If "any rate for charge," or "any rule, regulation, practice or contract affecting such rate [or] charge" falls short of that standard, FERC "must rectify the problem: It shall then determine what is 'just and reasonable' and impose 'the same by order.'" Id. (quoting 16 U.S.C. § 824e(a).

Furthermore, within the electricity market there are three general categories of actors: generators (orother entities that buy energy through bilateral contracts), transmitters, and load serving entities (LSEs). See Hughes v. Talen Energy Marketing, LLC, 136 S.Ct. 1288, 1292 (Apr. 29, 2016). Generators include power plants and other sources of energy production. Id. LSEs distribute power to the end user. DIVISION OF ENERGY MARKET OVERSIGHT OFFICE OF ENFORCEMENT, FEDERAL ENERGY REGULATORY COMMISSION, ENERGY PRIMER: A HANDBOOK OF ENERGY MARKET BASICS, 57-63 (2015) (available at www.ferc.gov/market-oversidght/guide/enerty-primer.pdf). Transmitters historically were private entities, but currently are nonprofit "Regional Transmission Organizations" ("RTOs") or "Independent System Operators" ("ISOs"). Id. There are seven RTOs in the United States. Id. The New England ISO ("ISO-NE"), which is of interest in this case, operates in New England, including in Connecticut. Id.

In 1978, Congress enacted the Public Utility Regulatory Practices Act ("PURPA"). "Technically, PURPA is one of several amendments to the Federal Power Act," whose provisions are codified in part in the FPA, 16 U.S.C. § 824a-3. See Allco Finance Limited v. Klee, 805 F.3d 89, 91 n. 1 (2015) (hereinafter "Allco II"). Given that the Federal Power Act gives FERC "exclusive authority to regulate sales of electricity at wholesale in interstate commerce," Allco II, 805 F.3d at 91 (citing 16 U.S.C. § 824(b)(1)), "States may not act in this area unless Congress creates an exception." Id. (citing 16 U.S.C. § 824(b)). "PURPA contains one such exception that permits states to foster electric generation by certain power production facilities ('qualifying facilities') that have no more than 80 megawatts of capacity and use renewable generation technology." Id. at 91-92. That particular aspect of the statutory scheme plays a part in the cases at bar.

This engrafting of PURPA upon the FPA reflects the fact that FERC's role in ensuring that a public utility's rates or charges for electricity are just and reasonable has evolved over the years as the industry has changed. "Decades ago, state or local utilities controlled their own power plants, transmission lines, and delivery systems, operating as vertically integrated monopolies in confined geographic areas." EPSA, 136 S.Ct. at 768. Since the FPA's passage, electricity has increasingly become a competitive interstate business, in which independent power plants abound, and electricity flows "not through the local power networks ofthe past, but instead through an interconnected 'grid' of near-nationwide scope." Id. (citation omitted). In that new world, FERC

often forgoes the cost-based rate-setting traditionally used to prevent monopolistic pricing. The Commission instead undertakes to ensure "just and reasonable" wholesale rates by enhancing competition - attempting, as we recently explained, "to break down regulatory and economic barriers that hinder a free market in wholesale electricity."

136 S.Ct. at 768 (quoting Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 536 (2008)).

There are two ways in which FERC achieves its regulatory aims. First, Generators and LSEs can enter private, bilateral contracts called "Power Purchase Agreements" (PPAs). See Hughes, 136 S.Ct. at 1292. If these bilateral contracts are made in good faith and are the result of arms-length negotiation, then they are presumed reasonable by FERC. Id. (citing Morgan Stanley, 554 U.S. at 546-48). Second, RTOs can buy from and sell to generators and LSEs through a FERC-approved auction process. Id. RTOs transmit the energy sold by generators to LSEs, but also run several markets under the supervision of FERC,...