Public Service Co. of New Hampshire v. Patch

Decision Date06 October 1998
Docket NumberNo. 98-1764,98-1764
Citation167 F.3d 15
PartiesPUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, et al., Plaintiffs, Appellees, and Connecticut Valley Electric Company and Central Vermont Public Service Corporation, and Unitil Corporation, et al., Plaintiffs/Intervenors, Appellees, v. Douglas PATCH, Chairman of the State of New Hampshire Public Utilities Commission, et al., Defendants, Appellants. . Heard
CourtU.S. Court of Appeals — First Circuit

Dennis Lane with whom Michael E. Tucci and Morrison & Hecker, L.L.P. were on brief for defendants Douglas L. Patch, Bruce B. Ellsworth and Susan S. Geiger.

Sarah B. Knowlton, Steven V. Camerino and McLane, Graf, Raulerson & Middleton, P.A. on brief for City of Claremont, New Hampshire, Amicus Curiae.

Douglas W. Smith, General Counsel, John H. Conway, Deputy Solicitor, and Deborah B. Leahy on brief for Federal Energy Regulatory Commission, Amicus Curiae.

Philip T. McLaughlin, Attorney General, Martin P. Honigberg, Senior Assistant Attorney General, Civil Bureau, James K. Brown, John A. Shope and Foley, Hoag & Eliot LLP on brief for Jeanne Shaheen, Governor of the State of New Hampshire, Amicus Curiae.

F. Anne Ross and F. Anne Ross, P.C. on brief for Retail Merchants Association of New Hampshire, New Hampshire Office of the Consumer Advocate, Campaign for Ratepayers Rights, Community Action Program, City of Manchester and Cabletron Systems, Inc., Amici Curiae.

Lee A. Freeman, Jr., and Allan B. Taylor with whom John F. Kinney, James T. Malysiak, Glynna W. Freeman, Freeman, Freeman & Salzman, P.C., Joseph M. Kraus, Vice President and General Counsel, Central Vermont Public Service Corporation, Dom S. D'Ambruoso, John T. Alexander, Ransmeier & Spellman, John B. Nolan, Allan B. Taylor, Gary M. Becker, Robert W. Clark and Day Berry & Howard were on brief for appellees Connecticut Valley Electric Company, Central Vermont Public Service Corporation, Public Service Company of New Hampshire, North Atlantic Energy Corporation, Northeast Utilities and Northeast Utilities Service Company.

Scott J. Mueller, Paul K. Connolly, Jr., Susan L. Geiser, Erica Tarpey and Leboeuf, Lamb, Greene & MacRae on brief for appellees Concord Electric Company, Exeter & Hampton Electric Company, Unitil Power Corp., and Unitil Corporation.

Before BOUDIN, Circuit Judge, BOWNES and REAVLEY, * Senior Circuit Judges.

BOUDIN, Circuit Judge.

The question presented on this appeal is whether a state plan deregulating the electric utility industry in New Hampshire was properly enjoined by the district court pending trial on the merits. The injunction was originally obtained by Public Service Company of New Hampshire ("PSNH") but was later extended to protect the other electric utilities in New Hampshire. A separate question, decided today in a companion decision in No. 98-1629, is whether the district court erred in granting specific relief to Connecticut Valley Electric Service Company ("Connecticut Valley"), arguably going beyond the injunction against the plan. 1

I. BACKGROUND

PSNH is the largest electric utility in New Hampshire and supplies about 70 percent of the retail electric power in the state. During the 1970s, PSNH began construction of a nuclear generating plant in Seabrook, New Hampshire. Delays and cost overruns at Seabrook were so extensive that in 1988 PSNH was forced to file for bankruptcy protection in New Hampshire. It appears that a state statute, passed to prevent recovery through rates of Seabrook's construction-in-progress costs, contributed to the debacle.

The State of New Hampshire intervened in the bankruptcy proceedings and ultimately a deal was hammered out. A major out-of-state utility--Northeast Utilities--agreed to acquire all of PSNH's stock and, through a corporate affiliate (North Atlantic Energy Corporation), it also took over Seabrook. The price paid, for the benefit of PSNH's creditors and stockholders, was $2.3 billion. As part of the transaction, the State of New Hampshire executed a rate agreement in November 1989 to permit Northeast Utilities to recover its full investment.

At the time, electric utilities in New Hampshire were subject to traditional utility rate regulation--here, by the New Hampshire Public Utility Commission (the "Commission")--through which retail rates are set to permit a utility to recover its prudently incurred costs, including a return on prudent investment in the facilities used to provide service. The rate agreement secured by Northeast Utilities contained formulas for allocating the recovery of the investment (including Seabrook) so that the impact on retail rates would be spread out over time.

The bankruptcy court approved the reorganization plan, including the rate agreement, In Re Public Serv. Co., 114 B.R. 820, 843 (Bankr.D.N.H.1990). The New Hampshire legislature authorized the Commission to review the rate agreement, N.H.Rev.Stat.Ann. § 362-C (1995), and the Commission approved the rate agreement. In Re Northeast Utils./Public Serv. Co., 114 P.U.R.4th 385, 1990 WL 488755 (N.H.P.U.C.1990). The New Hampshire Supreme Court upheld the approval. Appeal of Richards, 134 N.H. 148, 590 A.2d 586 (N.H.1991).

The rate agreement assured PSNH of annual 5.5 percent electric rate increases for a seven year period (now completed); and it provided that PSNH could buy Seabrook-generated power at prices sufficient to recover Seabrook costs. Partly for these reasons, New Hampshire electric rates rose sharply. In response, the New Hampshire legislature in 1996 adopted the Electric Utility Restructuring Act, N.H.Rev.Stat.Ann. §§ 374-F:1 et seq. (Supp.1997), providing for the introduction of competition into the electric utility industry in New Hampshire.

Under this statute, the Commission conducted hearings and on February 28, 1997, it issued a restructuring plan (the "Final Plan" or "Plan") and a set of implementing orders. See Order No. 22,514 (adopting general statewide Final Plan and Legal Analysis); see also Orders No. 22,509-22,513 (specific utilities' interim stranded cost rulings). The Plan is extremely complicated in its details but a brief summary of pertinent elements will suffice for the present.

First, the Plan provides that effective on the implementation of compliance filings all New Hampshire electric utilities will be required to separate ("unbundle") charges for their local distribution and transmission services from their generation services and permit use of their distribution facilities to carry--for a distribution charge--electricity generated by other suppliers. In effect, customers could then choose the source of their electrical power, the market would set prices through competition, and the Commission would merely set distribution charges (primarily based on cost) for the use of the distribution networks (which remain effective monopolies). 2 Within two years, the utilities would also be required to divest themselves of generation facilities.

Second, recognizing that market-based rates would likely not permit the utilities to recover all of their investment in existing plant in generation and transmission, the Commission provided for possible recovery of so-called "standard investment," both in the interim (pre-divestiture) phase and in the final (post-divestiture) phase--by allowing an increment to the distribution charge over and above actual distribution cost. How much of the stranded investment would ultimately be recovered through this mechanism is a matter of substantial dispute and depends in some measure on decisions yet to be made by the Commission; but in the interim phase, the aim was to cap the increment by use of a retail market proxy price to assure that the increment did not cause retail customers to pay more than 108 percent of regional average retail electric rates.

In sum, the Commission's Final Plan proposed to end the existing regime in which the agency set retail rates for electric power in New Hampshire based on cost. Operating in two phases, the new regime, mixing elements of competition and regulation, pressed toward market rates for retail power. The utilities' ability to recover their prudent investment in distribution, transmission and generation facilities was, at the very least, cast in doubt. This is so because even where the investment was originally prudent, full competition can easily make some of that investment unrecoverable. 3

On March 3, 1997, immediately after the Final Plan was adopted, PSNH filed a 13-count complaint in federal district court and requested a temporary restraining order against implementation of the Plan. PSNH argued that the Plan was preempted by specific provisions of the Federal Power Act, 16 U.S.C. §§ 791a to 825r, under which the Federal Energy Regulatory Commission ("FERC") regulates utilities; 4 the Public Utilities Regulatory Policies Act of 1978, Pub.L. No. 95-617, 92 Stat. 3117 (codified as amended in scattered sections of 15 and 16 U.S.C.); and the Public Utility Holding Company Act, 15 U.S.C. §§ 79 to 79z-6. PSNH also argued that the Plan constituted an unconstitutional taking and violated substantive due process, the Contracts Clause, the Commerce Clause, and the First Amendment.

In support of its TRO request, PSNH submitted affidavits including those of experts explaining that the adoption of the Final Plan, unless enjoined, would force PSNH under established accounting standards to write-off more than $400 million in investment, effectively repudiating the November 1989 rate agreement between New Hampshire and Northeast Utilities. In turn, the write-off and the alleged repudiation would place the company in default under a number of loan and credit agreements, prompting creditors to accelerate the collection of over $1 billion in debt and forcing PSNH into bankruptcy.

On March 10, 1997, the district court held a hearing on the TRO request at which both sides presented oral argument; the Commission presented no...

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