Independent Energy Producers Ass'n, Inc. v. California Public Utilities Com'n

• Decision Date: 22 September 1994
• Docket Number: No. 92-16201,92-16201
• Parties: INDEPENDENT ENERGY PRODUCERS ASSOCIATION, INC., et al., Plaintiffs-Appellants, v. CALIFORNIA PUBLIC UTILITIES COMMISSION, Defendant-Appellee, and San Diego Gas and Electric Company; Pacific Gas and Electric Company, et al., Defendants-Intervenors-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 848

36 F.3d 848

157 P.U.R.4th 263

INDEPENDENT ENERGY PRODUCERS ASSOCIATION, INC., et al Plaintiffs-Appellants, v. CALIFORNIA PUBLIC UTILITIES COMMISSION, Defendant-Appellee and San Diego Gas and Electric Company; Pacific Gas and Electric Company, et al., Defendants-Intervenors-Appellees.

No. 92-16201.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 8, 1994.

Withdrawn from Submission

Feb. 11, 1994.

Resubmitted Sept. 15, 1994.

Decided Sept. 22, 1994.

Gordon P. Erspamer, Morrison & Foerster, San Francisco, CA, for plaintiffs-appellants.

Ellen S. LeVine, California Public Utilities Com'n, San Francisco, CA, for defendant-appellee.

Michael C. Tierney, San Diego Gas & Electric Co., Randall J. Litteneker, Pacific Gas & Electric Co., San Francisco, CA, John R. McDonough, Carlsmith, Ball, Wichman, Murray, Case & Ichiki, Los Angeles, CA, for defendants-intervenors-appellees.

Susan Tomasky, Jerome M. Feit, Eric L. Christensen, Washington, DC, for amicus curiae Federal Energy Regulatory Com'n.

Appeal from the United States District Court for the Northern District of California.

Before: FLETCHER, KOZINSKI and TROTT, Circuit Judges.

FLETCHER, Circuit Judge:

Independent Energy Producers Association, Inc., ¹ Sithe Energies, Inc., and Destec Energy, Inc. (collectively "Independent Energy") appeal the district court's summary judgment in favor of the California Public Utilities Commission ("the CPUC") and Pacific Gas & Electric Co., San Diego Gas & Electric Co., and Southern California Edison Co. ("the Utilities"). Independent Energy brought this action in federal district court seeking a temporary restraining order to prevent the CPUC from implementing an order which delegates to the Utilities the authority to enforce federal operating and efficiency requirements set out in the Public Utility Regulatory Policies Act of 1978 ("PURPA") and in regulations promulgated by the Federal Energy Regulatory Commission ("the Commission").

Under Title II of PURPA, Congress designated for special treatment "qualifying cogeneration facilities" ("QFs") ² that meet federal operating and efficiency standards. PURPA and the federal regulations implementing it provide that public utilities are required to purchase electric energy from QFs at a rate that is equal to the incremental cost to the utility of purchasing or generating energy elsewhere. Independent Energy represents facilities that are QFs within the meaning of PURPA. Pursuant to federal law, the QFs and the Utilities entered into contracts for the sale and purchase of electric energy. These contracts contain standardized terms for the purchase and sale of electric energy and set the rates to be paid to the QFs for that energy.

In 1991, the Utilities and the CPUC devised a program which authorizes the Utilities to monitor the compliance with federal operating and efficiency standards of the QFs with which they have contracts. If a Utility determines that a QF does not meet federal operating and efficiency standards, it is authorized to suspend payment of the rates specified in the contract and to substitute a lower, "alternative" rate.

Independent Energy now challenges this program on the grounds that the Commission's authority to enforce PURPA's operating and efficiency requirements is exclusive and that the CPUC program is preempted by federal law. It contends that the CPUC program authorizes the Utilities to enforce PURPA's operating and efficiency standards, and thus represents a state intrusion into an area of exclusively federal regulation. The district court disagreed, and held that the CPUC program was not preempted by federal law. We have jurisdiction and we reverse and remand.

I

In order to understand the issues in this case, it is necessary to understand the structure of PURPA and the regulations promulgated thereunder.

A. The Federal Power Act

The Federal Power Act ("FPA"), 16 U.S.C. Sec. 791a et seq., provides that any person who owns or operates facilities used to transmit or sell electric energy in interstate commerce at wholesale is subject to the jurisdiction and regulatory power of the Commission. 16 U.S.C. Sec. 824(a) & (e). In 1978, Congress enacted PURPA, which amends the FPA. Title II of PURPA was enacted to encourage the development of cogeneration and small power production facilities, and thus to reduce American dependence on fossil fuels by promoting increased energy efficiency. To achieve this objective, Congress sought to eliminate two significant barriers to the development of alternative energy sources: (1) the reluctance of traditional electric utilities to purchase power from and sell power to non-traditional facilities, and (2) the financial burdens imposed upon alternative energy sources by state and federal utility authorities. E.g., Federal Energy Regulatory Comm'n v. Mississippi, 456 U.S. 742, 750-51, 102 S.Ct. 2126, 2132-33, 72 L.Ed.2d 532 (1982).

Section 201 of PURPA designates a group of facilities as QFs, which group includes any cogeneration facility that meets operating and efficiency requirements and ownership requirements prescribed by the Commission. 16 U.S.C. Sec. 796(18)(B).

Section 210 of PURPA specifies the benefits to which QFs are entitled. It creates a market for their energy by requiring that the Commission establish regulations that obligate public utilities to sell electric energy to and purchase electric energy from QFs. 16 U.S.C. Sec. 824a-3(a). Section 210(b) requires the Commission to promulgate regulations that ensure that the rates for these purchases "shall be just and reasonable to the electric consumers of the electric utility and in the public interest." However, these rates may not exceed the incremental cost to the utility of purchasing alternative electric energy. 16 U.S.C. Sec. 824a-3(b). This incremental cost is defined as "the cost to the electric utility of the electric energy which, but for the purchase from such [QF], such utility would generate or purchase from another source." 16 U.S.C. Sec. 824a-3(d). ³

B. The Commission's Regulations

In 1980, the Commission promulgated regulations pursuant to Title II of PURPA. 18 C.F.R. Part 292. These regulations are divided into two relevant parts: (1) Subpart B regulations define the operating and efficiency standards that cogeneration facilities must meet in order to qualify as QFs; and (2) Subpart C regulations define the benefits to which QFs are entitled.

Subpart B regulations, 18 C.F.R. Secs. 292.201-.211, deal with the requirements and procedures for determining QF status and describe the operating and efficiency standards that cogeneration facilities must meet in order to be certified as QFs. 18 C.F.R. Sec. 292.205. ⁴ They also establish two means by which a cogenerator can register its status as a QF. Under the Commission's "self-certification" procedure, a cogenerator simply provides the Commission with information demonstrating that it is in compliance with operating and efficiency standards; under this procedure, no affirmative action by the Commission is required. 18 C.F.R. Sec. 292.207(a)(2). Under the Commission's "optional" procedure, a cogenerating facility may apply to the Commission to obtain certification; under this procedure, the Commission must issue an order granting or denying certification within ninety days from receipt of the application. 18 C.F.R. Sec. 292.207(b).

In addition, Subpart B regulations provide that the Commission may revoke QF status if the QF has failed to comply with the statements contained in its application for certification. 18 C.F.R. Sec. 292.207(d). The regulations also provide that the Commission may waive operating and efficiency standards for a cogenerating facility upon a showing that the facility produces significant energy savings. 18 C.F.R. Sec. 292.205(c).

The second group of the Commission's regulations, Subpart C regulations, 18 C.F.R. Sec. 292.301-.308, regulate the purchase of energy by utilities from QFs as required by Sec. 210 of PURPA. They require that utilities purchase electric energy from and sell electric energy to QFs at the Utility's full "avoided cost" rate. 18 C.F.R. Sec. 292.304(d). "Avoided costs" are a utility's incremental costs for electric energy or capacity which, but for the purchase from the QF, the utility would generate itself or purchase from another source. ⁵ 18 C.F.R. Sec. 292.101(b)(6); see also American Paper Inst. v. American Elec. Power, 461 U.S. 402, 412-18, 103 S.Ct. 1921, 1927-31, 76 L.Ed.2d 22 (1983) (upholding the Commission's requirement that QFs receive full avoided cost rates, the statutory maximum under section 210). The regulations provide guidelines for the calculation of "avoided costs." The utility is required to submit data to the state regulatory agency, in this case the CPUC, which is considered by the CPUC along with other factors in calculating avoided costs. 18 C.F.R. Secs. 292.302(b)(2) & 292.304(e).

Subpart C regulations also provide that each QF has the option to sell energy on an "as available" basis or pursuant to a contract enforceable over a specified term. 18 C.F.R. Sec. 292.304(d)(1) & (2). If electric energy is purchased pursuant to a contract, the rate for such purchases is based on either the avoided cost as calculated at the time of delivery, or the avoided cost as calculated at the time the obligation is incurred. 18 C.F.R. Sec. 292.304(d)(2).

Finally, the Commission's regulations required the states to implement the Subpart C regulations. 18 C.F.R. Sec. 292.401. ⁶

C. CPUC Implementation

Pursuant to this statutory and regulatory command, the CPUC initiated a process in the early 1980s to develop contracts under which QFs could sell electric energy to and purchase electric energy from utilities. In 1982, the CPUC adopted "standard offer" contracts, which contain standardized contract terms and establish the prices to be paid QFs for electric energy. Dec. 82-01-103, OIR 2, 8 CPUC 2d 20 (1...