Appeal of Sinclair Mach. Products, Inc.

• Decision Date: 26 July 1985
• Docket Number: No. 84-380,84-380
• Citation: 126 N.H. 822,498 A.2d 696
• Parties: Appeal of SINCLAIR MACHINE PRODUCTS, INC. et al. (New Hampshire Public Utilities Commission).
• Court: New Hampshire Supreme Court

Page 696

498 A.2d 696

126 N.H. 822

Appeal of SINCLAIR MACHINE PRODUCTS, INC. et al. (New Hampshire Public Utilities Commission).

No. 84-380.

Supreme Court of New Hampshire.

July 26, 1985.

Myers and Laufer, Concord (David W. Jordan on brief and orally), for appellants Sinclair Machine Products, Inc. et al.

Ransmeier & Spellman, Concord (Steven E. Hengen) Concord, on brief and Donald L. Rushford, Rutland, Vt., on brief and orally), for Connecticut Valley Electric Company.

Orr & Reno, Concord (Richard B. Couser on brief), for Granite State Electric Company, as amicus curiae.

BATCHELDER, Justice.

This is an appeal of a New Hampshire Public Utilities Commission (PUC) decision of June 18, 1984, approving a rate increase for Connecticut Valley Electric Company (CVEC). CVEC, a New Hampshire utility company providing retail service to New Hampshire customers, is wholly owned by a Vermont corporation, Central Vermont Public Service Corporation (Central Vermont). CVEC purchases the vast bulk of its power at wholesale from Central Vermont. Its other power is supplied by local small power producers.

The rate paid by CVEC to Central Vermont for this wholesale power purchase was approved by the Federal Energy Regulatory Commission (FERC) pursuant to its authority under the Federal Power Act, 16 U.S.C. § 824 et seq. The rate itself is actually a part of a comprehensive agreement denominated Central Vermont "Rate RS-2." As approved by the FERC on February 1, 1982, the RS-2 rate sets the price at which Central Vermont will sell its wholesale power to CVEC, the terms under which that power will be supplied, provisions for termination of the agreement, and other mutual obligations of CVEC and Central Vermont respecting their relationship in the wholesale power transaction.

Approval of the RS-2 rate by the FERC on February 1, 1982, was based on a proposed unilateral settlement agreement submitted by Central Vermont. The proposed settlement was unopposed. The FERC approved the settlement as being in the public interest conditioned upon its not receiving adverse comment during the time period for such comment under its rules, and pointed out that its acceptance of the settlement "does not constitute approval of or precedent regarding any principle or issue in this proceeding." Among the costs which the FERC allowed Central Vermont to recover through the RS-2 rate were the costs of Central Vermont related to its investment in the abandoned Pilgrim II and Montague nuclear power plants.

Appellants Sinclair Machine Products, Inc. & a. (Sinclair), all retail customers of CVEC, intervened in CVEC's retail rate proceeding initiated before the PUC in July, 1983. Relying on the State's anti-CWIP statute, RSA 378:30-a, Sinclair opposed CVEC's attempt to recover through its retail rates that part of CVEC's power costs which reflected a pass-through of Central Vermont's cost of the abandoned Pilgrim II and Montague nuclear plants. The PUC held that the FERC's approval of the RS-2 rate preempted the PUC from examining the reasonableness of the wholesale rate and required that the costs associated with that wholesale purchase be allowed as a reasonable operating expense of CVEC which can be passed along to New Hampshire retail customers. This appeal followed. We reverse and remand. We hold that federal preemption of State authority requires that the wholesale rate fixed by the FERC binds the PUC, to the extent that the PUC may not disapprove such a rate even in light of the State's anti-CWIP statute. However, the PUC may always inquire into the reasonableness of a utility's purchasing power under a FERC-approved rate given other purchase options available to the utility.

The central question before the PUC in a retail rate case such as this is whether costs incurred under a wholesale rate, which has been approved as being a just and reasonable charge by the wholesaler, are just and reasonable operating expenses of the retail utility. If those costs are just and reasonable, then the retailer, CVEC, must be allowed to recover them through its rates to New Hampshire retail customers. See RSA 378:7.

The PUC never reached this question. It observed that the FERC had approved the wholesale rate charged by Central Vermont as being just and reasonable. The PUC then ruled that it was preempted from questioning the reasonableness of this rate. It further ruled that it had to "deem a FERC approved wholesale rate as a reasonable operating expense, even when that rate includes a CWIP element in violation of the New Hampshire legislation."

The PUC correctly determined under federal preemption principles that FERC approval of a wholesale rate precludes the PUC from questioning the reasonableness of that charge. However, it does not follow automatically that the PUC must find that power costs incurred under a wholesale rate are necessarily a reasonable expense for the retailer. The PUC stated expressly that it did not consider whether CVEC had alternatives to purchasing power from Central Vermont under the RS-2 rate and whether the purchases were reasonable. We must, therefore, remand this case to the PUC for additional findings before CVEC's burden of showing the reasonableness of this expense can be found to have been met.

We begin our analysis by examining New Hampshire law. RSA 378:30-a, the State's "anti-CWIP" law, provides:

"Public Utility Rate Base; Exclusions. Public utility rates or charges shall not in any manner be based on the costs of construction work in progress. At no time shall any rates or charges be based upon any costs associated with construction work if said construction work is not completed. All costs of construction work in progress, including, but not limited to, any costs associated with constructing, owning, maintaining or financing construction work in progress, shall not be included in a utility's rate base nor be allowed as an expense for rate making purposes until, and not before, said construction project is actually providing service to consumers."

In Appeal of Public Service Co. of New Hampshire, 125 N.H. 46, 480 A.2d 20 (1984), we held that this statute barred recovery through rates of the cost of abandoned plant. The statute "forbid[s] both the amortization of the investment as an expense and the inclusion of the investment, or any unauthorized portion of it, in the rate base." Id. at 55, 480 A.2d at 25.

The FERC, however, has applied a different rule in setting the wholesale rate in this case. See, 18 C.F.R. 35.26 (allowing CWIP in rate base). Costs related to the abandonment of the Pilgrim II and Montague plants have been allowed by the FERC in determining the RS-2 rate. Moreover, this rate is set pursuant to an expansive federal regulatory process designed to implement very substantial federal interests in the field of energy supply and distribution. Therefore, our attention must focus on the doctrine of federal preemption of State action in order to determine what jurisdiction, if any, the PUC may exercise with respect to the wholesale power cost of CVEC in this retail rate case.

Federal preemption doctrine is based upon Article VI of the United States Constitution which declares federal law to be the supreme law of the land:

"This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any thing in the Constitution or Laws of any State to the Contrary notwithstanding."

As to matters involving interstate commerce in the federal domain, "Congress may, if it chooses, take unto itself all regulatory authority ..., share the task with the States, or adopt as federal policy the state scheme of regulation. The question in each case is what the purpose of Congress was." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 229-30, 67 S.Ct. 1146, 1151-52, 91 L.Ed. 1447 (1947) (citations omitted). Where Congress has legislated in a field traditionally occupied by the States, courts "start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress." Id. at 230, 67 S.Ct. at 1152.

Congress may manifest its purpose in several ways. Id.

"Absent explicit preemptive language, Congress [sic] intent to supersede state law altogether may be found from a 'scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,' 'because the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,' or 'because the object sought to be obtained by federal law and the character of obligations imposed by it may reveal the same purpose.' ... Even where Congress has not entirely displaced state regulation in a specific area, state law is preempted to the extent that it actually conflicts with federal law. Such a conflict arises when 'compliance with both federal and state regulations is a physical impossibility,' ... or where state law 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' "

Exxon Corp. v. Eagerton, 462 U.S. 176, 182, 103 S.Ct. 2296, 2301, 76 L.Ed.2d 497 (1983) (citations omitted) (emphasis added). "[T]he regulation of utilities is one of the most important of the functions traditionally associated with the police powers of the States." Arkansas Elec. Coop. v. Ark. Public Serv. Comm'n., 461 U.S. 375, 377, 103 S.Ct. 1905, 1908, 76 L.Ed.2d 1 (1983); see also Northern States Power Co. v. Hagen, 314 N.W.2d 32, 36 (N.D.1981). Therefore, congressional purpose to preempt State regulation of retail utility rates will not be presumed, but must be manifest or...