City of Morgan City v. South Louisiana Elec. Co-op. Ass'n

• Citation: 31 F.3d 319
• Decision Date: 12 September 1994
• Docket Number: No. 93-4295,93-4295
• Parties: CITY OF MORGAN CITY, Plaintiff-Intervenor-Defendant-Appellant, v. SOUTH LOUISIANA ELECTRIC COOPERATIVE ASSOCIATION, Defendant-Intervenor-Appellee, Third Party-Plaintiff-Appellee, and Cajun Electric Power Cooperative, Inc., Intervenor-Plaintiff-Appellee, and United States of America, thru Rural Electrification Administration (REA), Third Party-Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 319

31 F.3d 319

CITY OF MORGAN CITY, Plaintiff-Intervenor-Defendant-Appellant, v. SOUTH LOUISIANA ELECTRIC COOPERATIVE ASSOCIATION,

Defendant-Intervenor-Appellee, Third

Party-Plaintiff-Appellee,

and

Cajun Electric Power Cooperative, Inc., Intervenor-Plaintiff-Appellee,

and

United States of America, thru Rural Electrification

Administration (REA), Third Party-Defendant-Appellee.

No. 93-4295.

United States Court of Appeals, Fifth Circuit.

Sept. 12, 1994.

Dale Hughes Hayes, Leonard & Hayes, Morgan City, LA, Wallace E. Brand, Brand, Beeny, Berger & Whitler, Washington, DC, for City of Morgan City.

James M. Funderburk, Duval, Funderburk, Sundbery & Lovell, Houma, LA, for South Louisiana Elec. Co-op. Ass'n.

William E. Hodgkins, John Schwab, Schwab & Walter, Baton Rouge, LA, for Cajun Elec. Power Co-op., Inc.

John Christopher Kohn, U.S. Dept. of Justice, Thomas M. Bondy, Mark B. Stern, U.S. Dept. of Justice, Civ.Div., Appellate Staff, Washington, DC, for U.S.

Clifton S. Elgarten, Amy J. Mauser, Crowell & Moring, Washington, DC, for amicus curiae American Public Power Ass'n, Nat. Institute of Mun. Law Officers and Nat. League of Cities.

Wallace F. Tillman, Jonathan Hemenway Glazier, Nat. Rural Elec. Co-op. Ass'n, Washington, DC, for amicus curiae Nat. Rural Elec. Co-op. Ass'n.

N. Beth Emery, Sutherland, Asbill & Brennan, Washington, DC, for amicus curiae Nat. Rural Elec.

Appeal from the United States District Court For the Western District of Louisiana.

Before POLITZ, Chief Judge, DAVIS and WIENER, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

This appeal revolves around a municipality's attempt to condemn equipment and electricity consumers within an area annexed by the municipality. South Louisiana Electric Cooperative Association (SLECA), the current electricity providers, along with their federal financier, the Rural Electrification Administration (REA), opposed the state-law expropriation and sought summary judgment. The district court found that the REA Administrator had authority under the Rural Electrification Act (REAct), 7 U.S.C. Sec. 901 et seq., to withhold approval of the state-law expropriation so that the state-law expropriation was preempted under the Supremacy Clause, 837 F.Supp. 194. We affirm on the alternative ground that the state-law expropriation is preempted because it would frustrate a federal purpose.

I.

In January 1985, the City of Morgan City annexed a small suburban area containing approximately 252 electricity consumers. These electricity consumers were serviced by SLECA, a rural power cooperative financed by the federal government under the REAct. ¹ SLECA buys its power in bulk from Cajun Electric Power Cooperative (Cajun), also an REA-financed cooperative. ² To secure their federal loans, SLECA and Cajun have mortgaged their assets to the REA.

After the annexation, Morgan City, which operates its own municipal utility, ³ offered to purchase all of SLECA's property in the area, including the exclusive right to provide power to electricity consumers in the area. When SLECA refused the offer, Morgan City brought this expropriation action pursuant to L.R.S. 19:101 et seq., seeking to condemn the disputed property rights.

Cajun intervened as a party defendant. The REA was joined as a third party defendant on the basis of its security interest in the property at issue and removed the case to federal court.

Thereafter, the REA Administrator filed into the record a signed declaration objecting to Morgan City's state-law expropriation on grounds that the expropriation would jeopardize the REA's ability to protect its loans and would cause substantial harm to the federal rural electrification program.

The Administrator asserted that the threatened expropriation would frustrate the federal rural electrification program for several reasons. First, the annexed area is the most heavily populated part of SLECA's service area and thus is the area SLECA is able to serve most economically and efficiently. Thus, the disputed area provides SLECA with its most profitable customers. According to the Administrator, loss of this area's customer load could jeopardize SLECA's financial health and result in a rate increase for SLECA's remaining customers. The Administrator contends that this danger is especially acute in light of the impact of future planned expropriations in the Morgan City area whose cumulative impact on SLECA's electric system would be devastating.

The Administrator further objected to the expropriation on grounds that the expropriation could negatively affect not only SLECA, but the entire chain of REA-financed member cooperatives. Cajun provides power under wholesale contracts to twelve other REA-financed distribution cooperatives, which in turn distribute to rural electricity customers. Reduction in the volume of Cajun's distributions as a result of this and other state-law expropriations could increase the cost of Cajun's wholesale power. This increase in cost of electric power would be passed on to the entire rural area serviced by federally financed member distributor cooperatives.

The REA, joined by SLECA and Cajun, filed a motion to dismiss or, in the alternative, for summary judgment, arguing that Morgan City's expropriation action was preempted by the REAct. The district court granted the defendants' summary judgment motion and dismissed the expropriation. The court based its ruling on two conclusions: (1) the Administrator's determination that the expropriation would be contrary to the federal rural electrification program was not arbitrary and capricious; and (2) the REAct, 7 U.S.C. Sec. 907, authorized the Administrator to withhold approval of the transfer even though the transfer was involuntary. The City of Morgan City appeals.

II.

The federal government, when acting within the confines of its constitutional authority, is empowered to preempt state law to the extent necessary to achieve a federal purpose. U.S. Const. art. VI, cl. 2. The Supreme Court has explained that preemption of state law may occur in several different ways. Louisiana Public Service Commission v. FCC, 476 U.S. 355, 368-69, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986). First, Congress may expressly preempt state law. Pacific Gas & Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 U.S. 190, 203, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983). Second, Congress may legislate so comprehensively that it creates a "reasonable ... inference that Congress left no room for the States to supplement it." Id. at 204, 103 S.Ct. at 1722. Under such circumstances, where Congress intends that federal law "occupy the field"--i.e., be exclusive in the area, state law within the field is preempted. Third, state law is displaced to the extent that it conflicts with federal action. Id. This last breed of preemption, conflict preemption, may occur in two ways. First, a provision of state law may be incompatible with a federal statute such that compliance with both is a "physical impossibility." Id. Second, even if compliance with both is not impossible, state law is nonetheless preempted if its application would disturb, interfere with, or seriously compromise the purposes of the federal statutory scheme. Id. In other words, an application of state law that would frustrate the purpose of a federal statutory scheme is preempted. See id. at 220-21, 103 S.Ct. at 1731.

In this case, we elect to turn directly to the applicability of the second variety of conflict preemption to the facts presented by the summary judgment evidence. See United States v. Early, 27 F.3d 140, 142 (5th Cir.1994) (court can affirm on an alternative basis). Accordingly, we save for another day the issue of whether 7 U.S.C. Sec. 907 by its terms confers authority on the Administrator to withhold approval of an involuntary disposition, and instead consider only whether a conflict exists because the proposed state-law expropriation would frustrate a federal purpose.

Under the second variety of conflict preemption, Morgan City's expropriation may be preempted if the action would frustrate a federal purpose. Stated differently, state action is preempted if its effect is to discourage conduct that federal legislation specifically seeks to encourage. For example, in Xerox Corp. v. County of Harris, 459 U.S. 145, 103 S.Ct. 523, 74 L.Ed.2d 323 (1982), the Supreme Court held that a state tax could not be imposed on goods manufactured in Mexico, shipped to the United States, and held under bond in a customs warehouse awaiting shipment abroad. Id. at 154, 103 S.Ct. at 528. The Court found that a long history of federal legislation indicated a clear intent to create duty-free enclaves for such imported goods stored in this country pending export so as to encourage merchants to use American ports. Id. at 150-52, 103 S.Ct. at 525-27. The Court held that although a state tax on such goods was not expressly prohibited, its imposition was preempted because such a tax would manifestly discourage and financially penalize the very acts the federal law was meant to foster. In this vein, we therefore turn our attention in this case to the effect of the state-law expropriation on the federal legislation.

1. The Goals of the REAct

In 1936, Congress enacted the REAct for the purpose of ensuring that electric service would be provided to rural America. By enacting the legislation and creating the REA, Congress determined that the national interest would be served by subsidizing the rural user of electricity. Prior to the REAct, rural areas which were thinly populated and had lower demand for electricity failed to attract investor-owned utilities for the obvious reason that providing service to these areas was costly and therefore unprofitable. See, e.g., Tri-State Generation & Transmission Assn., Inc. v. Shoshone River Power, Inc., 874 F.2d 1346, 1348 (10th Cir.1989). The REA encouraged rural electrification by providing low...