Niagara Mohawk Power Corp. v. F.E.R.C.

• Decision Date: 27 August 2001
• Docket Number: No. 95-CV-634.,95-CV-634.
• Citation: 162 F.Supp.2d 107
• Parties: NIAGARA MOHAWK POWER CORPORATION, Plaintiff, New York State Electric & Gas Corporation, Plaintiff-Intervenor, v. FEDERAL ENERGY REGULATORY COMMISSION, New York State Public Service Commission, Harold A. Jerry, Jr., Lisa Rosenblum, William D. Cotter, Raymond J. O'Connor and John F. O'Mara, Defendants, Independent Power Producers of New York, Inc., Defendant-Intervenor.
• Court: U.S. District Court — Northern District of New York

162 F.Supp.2d 107

NIAGARA MOHAWK POWER CORPORATION, Plaintiff New York State Electric & Gas Corporation, Plaintiff-Intervenor, v. FEDERAL ENERGY REGULATORY COMMISSION, New York State Public Service Commission, Harold A. Jerry, Jr., Lisa Rosenblum, William D. Cotter, Raymond J. O'Connor and John F. O'Mara, Defendants Independent Power Producers of New York, Inc., Defendant-Intervenor.

No. 95-CV-634.

United States District Court, N.D. New York.

August 27, 2001.

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Michael W. Murphy, Niagara Mohawk Power Corporation, Syracuse, New York, Edward Berlin, Robert V. Zener, Swidler Berlin Shereff Friedman, L.L.P., Washington, D.C., for plaintiff.

Richard M. Lorenzo, Jonathan D. Schneider, Huber Lawrence & Abell, New York City, for plaintiff-intervenor.

Monique Penn-Jenkins, Federal Energy Regulatory Commission, Washington, D.C., Lawrence G. Malone, Jonathan D. Feinberg, Public Service Commission of the State of New York, Albany, New York, Howard S. Read, David B. Johnson, Read and Laniado, Albany, New York, for defendant-intervenor.

MEMORANDUM—DECISION AND ORDER

MORDUE, District Judge.

I. Introduction

The present matter arises in substantial part from the Public Utilities Regulatory Policies Act ("PURPA"), codified at 16 U.S.C. § 824a-3. PURPA was intended by Congress to promote long-term economic growth by reducing the nation's reliance on oil and gas, to encourage the development of alternative energy sources and thereby to combat a nationwide energy crisis. Section 210(a) of PURPA required the Federal Power Commission ("FPC"), now known as the Federal Energy Regulatory Commission ("FERC"), to "prescribe, and from time to time thereafter revise" rules requiring electric utilities to offer both to sell and purchase electric energy from qualifying cogeneration facilities ("QFs").¹ 16 U.S.C. § 824a-3(a). Section 210(b) of PURPA required that the rates utilities paid for power purchased from QFs be "just and reasonable to the electric consumers" and "not discriminate" against QFs. 16 U.S.C. § 824a-3(b). Finally, in Section 210(e), PURPA exempted QFs from federal and state regulatory control in connection with rates and financial organization. See 16 U.S.C. § 824a-3(e).²

Section 210(b) of PURPA declares that "[n]o such rule [promulgated by FERC] ... shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." 16 U.S.C. § 824a-3(b). The "incremental cost" to the electric utility of alternative electric energy is defined as "the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source." 16 U.S.C. § 824a-3(d). The incremental cost described by Congress in PURPA is defined in the accompanying regulations as "avoided costs," or those costs which the utility "avoided" incurring itself by purchasing power from a QF. See 18 C.F.R. § 292.101(b)(6).³

In an effort to apply the tenets of PURPA to the states, Congress also directed that each state regulatory authority implement the rules prescribed by FERC pertaining to electric utilities' obligation to purchase power from QFs. See 16 U.S.C. § 824a-3(f).⁴ Thus, in 1980, the New York State legislature enacted New York Public Service Law § 66-c, which provided that the defendant New York Public Service Commission ("PSC") would require state regulated electrical utilities to enter into long-term contracts, a/k/a power purchase agreements ("PPAs"), for the purchase of electricity from alternative energy sources, including cogeneration facilities. See N.Y.Pub.Serv.Law § 66-c. New York's definitions of a QF "overlapped aspects of the federal definitions, but [were] not identical thereto." Consol. Edison Co. of New York, Inc. v. PSC ("Consol. Edison I"), 98 A.D.2d 377, 380, 471 N.Y.S.2d 684 (3d Dep't 1983) (citing N.Y.Pub.Serv.Law § 2(2-a) and (2-b)). Generally, however, "those facilities that qualif[ied] under PURPA ... also qualif[ied] under the [Pub.Serv.Law.]" Consol. Edison Co. of New York, Inc. v. PSC ("Consol. Edison II"), 63 N.Y.2d 424, 432, 483 N.Y.S.2d 153, 472 N.E.2d 981 (1984). Furthermore, Section 66-c granted PSC authority to oversee the contracting process and set the purchase rate for long-term PPAs. See id.

The New York law did not adopt PURPA's "avoided cost" ceiling for purchases, however. In 1981, Section 66-c was amended to require PSC to establish a minimum sales price for power purchased from state qualifying QFs of at least six cents per kilowatt hour ("kwH"). See N.Y.L.1981, ch. 843, § 9. The amendment, commonly referred to as the "Six-Cent Law," did not apply to federally qualified QFs, but as referenced above, most entities qualified as QFs under state law also qualified under PURPA.

Effective July 24, 1992, New York's legislature once again amended § 66-c of the Public Service Law and partially repealed the Six-Cent Law. The amendment preserved the minimum rate, however, for:

any contract fully executed by the parties and filed with the [PSC] on or before [June 26, 1992] and (i) providing for the purchase of electricity at such minimum sales price; or (ii) providing for the purchase of electricity at a utility tariff rate referencing a statutory minimum sales price; or (iii) providing for the reconciliation or recalculation of such contract's purchase price by comparison to such statutory minimum sales price or tariff rate, for the duration of any such contract and performance thereunder, provided however, that such minimum sales price shall be implemented in accordance with the policies and conditions established by [PSC.]

N.Y.Pub.Serv.Law § 66-c(2) (McKinney 1996 Supp.). The amendment also "grand-fathered" QFs which had obtained the legal right to receive the statutory minimum of six cents per kwH by way of a final, unappealable judgment of a New York State court prior to January 1, 1987. See id.

Plaintiff, Niagara Mohawk Power Corporation ("Niagara"), a traditional electrical utility, brings the present action principally to obtain relief from eleven long-term contracts⁵ with various QFs, none of which are parties in this case. In each instance, Niagara's PPA requires it to pay for energy purchased from QFs at six cents per kwH as required by the N.Y.Pub.Serv. Law. According to Niagara, its payments under the eleven PPAs in question will significantly exceed its "avoided costs" by approximately $93 million over the terms of the agreements unless the contracts, or the orders and requirements on which they are based, are "revoked or revised to comply with federal law" which limits rates for QF purchases to a utility's "incremental" or avoided costs. See 16 U.S.C. § 824a-3(b).

II. Procedural and Regulatory History

A. PURPA Regulations

PURPA required FERC to prescribe regulations to implement the statute "[n]ot later than 1 year after November 9, 1978." 16 U.S.C. § 824a-3(a). Following public rulemaking proceedings, FERC promulgated regulations governing transactions between utilities and QFs in connection with purchase and sales of electricity. See Small Power Prod. & Cogeneration Facilities, Regs. Implementing Section 210 of [PURPA], Order No. 69, 45 Fed.Reg. 12214 (Feb. 25, 1980). In Am. Elec. Power Serv. Corp. v. FERC, 675 F.2d 1226 (D.C.Cir.1982) ("AEP"), four utilities challenged the legality of the very regulations at issue in this case. There, the court held that FERC failed to adequately explain or justify its adoption of the full avoided cost standard in light of the enabling statute, PURPA, which mandated that rates charged to consumers be reasonable and that rates paid to QFs not exceed utilities' incremental costs. See AEP, 675 F.2d at 1232. The plaintiff utilities in AEP argued that the "just and reasonable" language regarding purchase rates in Section 210(b) of PURPA required that rates be set at the lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest. Although FERC could have enacted rules which required states to set PPA rates at less than avoided costs, FERC adopted "as a uniform rule, the maximum purchase rate specified in the statute," after concluding that the full avoided cost standard "would be just and reasonable in every case" as necessary to encourage cogeneration. Id. at 1233. The court found that FERC failed to adequately balance the interests of cogenerators, the public and consumers of electric utilities in rejecting, in an "across-the-board manner," PPA rates below full avoided costs. Id. at 1236.

In Am. Paper Inst., Inc. v. Am. Elec. Power Serv. Corp., 461 U.S. 402, 103 S.Ct. 1921, 76 L.Ed.2d 22 (1983) ("API"), the Supreme Court reversed, in part, the D.C. Circuit's determination that FERC had improperly promulgated its avoided cost rules. There, the Court found that FERC had fulfilled its obligation under PURPA to set a rate which was "in the public interest," because "the words `public interest' in a regulatory statute ... take meaning from the purposes of the regulatory legislation." 461 U.S. at 417, 103 S.Ct. 1921 (quoting Nat'l Assoc. for the Advancement of Colored People v. FPC, 425 U.S. 662, 669, 96 S.Ct. 1806, 48 L.Ed.2d 284 (1976) ("NAACP v. FPC")). The Court found that the primary purpose of PURPA was to encourage cogeneration and that the "just and reasonable to ... consumers" language of PURPA required FERC only to "consider[ ] ... potential rate savings for electric utility consumers." Id. at 415, n. 9, 103 S.Ct. 1921. In the Court's estimation, FERC did consider the possibility of such rate savings, but rejected a percentage-of-avoided-costs approach after determining that purchase rates set at below avoided costs might discourage QF production. See id. at 415, 103 S.Ct. 1921 (citing Small Power Prod. & Cogeneration Facilities; Regs. Implementing Section 210 of [PURPA], Order No. 69, 45 Fed.Reg. at...