North Amer. Nat. Resources v. Michigan Public Ser.

• Decision Date: 24 November 1998
• Docket Number: No. 5:98-CV-23.,No. 5:98-CV-21.,No. 5:98-CV-24.,No. 5:98-CV-22.,5:98-CV-21.,5:98-CV-22.,5:98-CV-23.,5:98-CV-24.
• Citation: 41 F.Supp.2d 736
• Parties: NORTH AMERICAN NATURAL RESOURCES, INC., et al., Plaintiffs, v. MICHIGAN PUBLIC SERVICE COMM'N, et al., Defendants. Midland Cogeneration Venture Limited Partnership, Plaintiffs, v. Michigan Public Service Comm'n, et al., Defendants. Michigan Power Limited Partnership and ADA Cogeneration Limited Partnership, Plaintiff, v. Michigan Public Service Comm'n, et al., Defendants. Central Wayne Energy Recovery Limited Partnership, Plaintiff, v. Michigan Public Service Comm'n, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

Page 736

41 F.Supp.2d 736

NORTH AMERICAN NATURAL RESOURCES, INC., et al., Plaintiffs, v. MICHIGAN PUBLIC SERVICE COMM'N, et al., Defendants.

Midland Cogeneration Venture Limited Partnership, Plaintiffs, v. Michigan Public Service Comm'n, et al., Defendants.

Michigan Power Limited Partnership and ADA Cogeneration Limited Partnership, Plaintiff, v. Michigan Public Service Comm'n, et al., Defendants.

Central Wayne Energy Recovery Limited Partnership, Plaintiff, v. Michigan Public Service Comm'n, et al., Defendants.

No. 5:98-CV-21.

No. 5:98-CV-22.

No. 5:98-CV-23.

No. 5:98-CV-24.

United States District Court, W.D. Michigan, Southern Division.

November 24, 1998.

COPYRIGHT MATERIAL OMITTED

Thomas J. Waters, Fraser, Trebilcock, Davis & Foster, PC, Lansing, MI, for North American Natural Resources, Inc., Commonwealth Power Co., Hubbardston Hydro Co., Cadillac Renewable Energy, LLC, Granger Elec. Co., Adrian Energy Associates, LLC, Michigan Cogeneration Systems, Inc., Sumpter Energy Assoc., Ltd. Partnership, Riverview Energy Systems Partnership, Inc., Viking Energy of Lincoln, Inc., Viking Energy of McBain, Inc., Grayling Generating Station Ltd. Partnership, Hillman Power Co., LLC, Genesee Power Station, LP, Charter Township of Ypsilanti.

Patricia S. Barone, Assistant Atty. Gen., David A. Voges, Assist. Atty. Gen., Jennifer M. Granholm, Atty. General, Public Service Div., Lansing, MI, for Michigan Public Service Com'n, John G. Strand, John C. Shea, David A. Svanda.

Stephen O. Schultz, Foster, Swift, Collins & Smith, PC, lansing, MI, for Midland Cogeneration Venture Ltd. Partnership.

David E.S. Marvin, Fraser, Trebilcock, Davis & Foster, PC, Lansing, MI, for Michigan Power Ltd. Partnership.

OPINION

QUIST, District Judge.

The Plaintiffs in these consolidated cases own and operate electric cogeneration facilities which are "qualifying facilities" ("QF") under the Public Utility Regulatory Policies Act of 1978 ("PURPA"), 16 U.S.C. §§ 824-824k.¹ Plaintiffs filed their complaints against Defendants seeking a declaration that certain orders issued by the Michigan Public Service Commission ("MPSC") are in conflict with and violate PURPA. Plaintiffs in case nos. 5:98-CV-21 and 5:98-CV-22 also seek declaratory relief based upon Defendants' alleged violation of Plaintiffs' due process rights under the Fourteenth Amendment. Defendants have moved for dismissal of Plaintiffs' complaints pursuant to Fed. R.Civ.P. 12 on several grounds, including Eleventh Amendment immunity and abstention. The parties have submitted briefs on the issue. For the reasons stated below, Defendants' motions will be denied.

Overview of PURPA

Under the Federal Power Act ("FPA"), 16 U.S.C. § 791a - 825u, 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 Federal Energy Regulatory Commission ("FERC"). See 16 U.S.C. § 824. In 1978, Congress modified the FPA by enacting PURPA² as part of a comprehensive package of energy legislation in response to the nationwide energy crisis. See FERC v. Mississippi, 456 U.S. 742, 745, 102 S.Ct. 2126, 2130, 72 L.Ed.2d 532 (1982); Fulton Cogeneration Assocs. v. Niagara Mohawk Power Corp., 84 F.3d 91, 94 (2d Cir.1996). Among other things, "PURPA is intended to control power generation costs and ensure long-term economic growth by reducing the nation's reliance on oil and gas and increasing the use of more abundant, domestically produced fuels." Freehold Co-generation Assocs., L.P. v. Board of Regulatory Comm'rs of New Jersey, 44 F.3d 1178, 1182 (3d Cir.1995). Section 210 of PURPA reflects Congress' policy of requiring utility companies to sell electric energy to, and buy electric energy from, nontraditional electric producing facilities.

Congress believed that increased use of these sources of energy would reduce the demand for traditional fossil fuels. But it also felt that two problems impeded the development of nontraditional generating facilities: (1) traditional electricity utilities were reluctant to purchase power from, and to sell power to, the nontraditional facilities, and (2) the regulation of these alternative energy sources by state and federal utility authorities imposed financial burdens upon the nontraditional facilities and thus discouraged their development.

In order to overcome the first of these perceived problems, § 210(a) directs FERC, in consultation with state regulatory authorities, to promulgate "such rules as it determines necessary to encourage cogeneration and small power production," including rules requiring utilities to offer to sell electricity to, and purchase electricity from, qualifying co-generation and small power production facilities....

To solve the second problem perceived by Congress, § 210(e), 16 U.S.C. § 824a-3(e), directs FERC to prescribe rules exempting the favored cogeneration and small power facilities from certain state and federal laws governing electricity utilities.

FERC v. Mississippi, 456 U.S. at 750-51, 102 S.Ct. at 2132-33.

Pursuant to § 210(b) and the regulations implemented by FERC, utilities must purchase electricity from qualifying facilities ("QF") at rates which are "just and reasonable to the electric utility and in the public interest" and which do "not discriminate against" QFs. 16 U.S.C. § 824a-3(b); 18 C.F.R. § 292.304(a)(1)(i), (ii). The FERC regulations require a utility to purchase electricity from a QF at the utility's "avoided cost," which is defined as "the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source." 18 C.F.R. §§ 292.101(b)(6), .304(a)(2). In addition, the FERC's rules exempt QFs from certain state laws and regulations, including state law governing the rates of electric utilities. See 18 C.F.R. § 292.602.

The FERC regulations permit a QF to either provide energy as the QF determines energy to be available for purchases, or to enter into an enforceable contract for the delivery of energy over a specified term. See 18 C.F.R. § 292.304(d). If a QF chooses the latter option, the QF may elect to set the rates based upon the utility's avoided costs either at the time of delivery or at the time the QF incurs its obligation to deliver energy, i.e., up-front. See id. § 292.304(d)(2); Independent Energy Producers v. California Pub. Utils. Comm'n, 36 F.3d 848, 851-52 (9th Cir.1994).

State regulatory authorities such as the MPSC are required to implement PURPA pursuant to the rules and regulations promulgated by FERC. See 16 U.S.C. § 824a-3(f). A state has broad authority to implement PURPA with respect to the approval of purchase contracts between utilities and QFs. See Crossroads Cogeneration Corp. v. Orange & Rockland Utils., Inc., 159 F.3d 129, 135 (3d Cir.1998) ("Though PURPA does limit the authority of state agencies in some respects, e.g., by exempting cogeneration facilities from some regulation, PURPA still provides a substantial role to state agencies in regulating energy contracts between utilities and cogenerators"); Independent Energy Producers, 36 F.3d at 856 (noting that "[t]he state's authority to implement section 210 is admittedly broad"). While states do play a substantial role in implementing PURPA and approving contracts between utilities and QFs, once a state regulatory commission establishes the "avoided cost" to be paid, the state no longer has authority to regulate the QF's rate. See Freehold, 44 F.3d at 1191-92; cf. Independent Energy Producers, 36 F.3d at 858 (finding that variances in anticipated fuel prices did not give the state and the utilities the right to unilaterally alter the purchase contract because under federal regulations "QFs are entitled to deliver energy to utilities at an avoided cost rate calculated at the time the contract is signed").

Facts

Each Plaintiff in this case has entered into a long-term Power Purchase Agreement ("PPA") with either Consumers Power Company or Detroit Edison to supply electric power at "avoided cost" rates as required by PURPA. Plaintiffs elected to have the utilities' avoided costs determined as of the time they entered into the PPAs. Defendant MPSC approved Plaintiffs' PPAs.

On December 19, 1996, the MPSC Staff filed a report which outlined a conceptual framework for restructuring the electric utility industry in Michigan. The basic plan or the restructuring was to gradually permit all electric utility customers to choose their own suppliers of power, such as Plaintiffs, although the electric utilities would continue to distribute or transmit the power to consumers. Following a series of hearings, the MPSC issued orders dated June 5, 1997, and October 29, 1997, which provided for the restructuring in the service territories of Consumers and Detroit Edison. Among other things, the orders provided that certain QF avoided costs would be classified as "stranded costs"³ for purposes of recovery by utilities through retail rates and that the last day for utilities to collect "stranded costs" would be December 31, 2007.

Various parties that were dissatisfied with the October 29, 1997, order filed petitions for rehearing. In its Rehearing on Restructuring Order, issued January 14, 1998, the MPSC confirmed that the last day for collecting stranded costs was December 31, 2007. Interpreting the orders as preventing Consumers and Detroit Edison from recovering the rates owed to Plaintiffs after the year 2007, certain Plaintiffs in this case filed petitions to intervene before the MPSC seeking clarification that the orders did not impact Plaintiffs' rights under their PPAs by precluding the utilities from collecting their "stranded costs" beyond the year 2007. On February 11, 1998, the MPSC issued an order in response to the petitions to intervene and motions for...