STILWELL, OKL. v. Ozarks Rural Elec. Co-op. Corp., 94-293-S.

• Citation: 870 F. Supp. 1025
• Decision Date: 04 November 1994
• Docket Number: No. 94-293-S.,94-293-S.
• Parties: CITY OF STILWELL, OKLAHOMA, Plaintiff, v. OZARKS RURAL ELECTRIC COOPERATIVE CORP.; United States of America ex rel. Rural Electrification Administration; and National Rural Utilities Cooperative Finance Corp., Defendants.
• Court: U.S. District Court — Eastern District of Oklahoma

870 F. Supp. 1025

CITY OF STILWELL, OKLAHOMA, Plaintiff, v. OZARKS RURAL ELECTRIC COOPERATIVE CORP.; United States of America ex rel. Rural Electrification Administration; and National Rural Utilities Cooperative Finance Corp., Defendants.

No. 94-293-S.

United States District Court, E.D. Oklahoma.

November 4, 1994.

Lloyd E. Cole, Jr., Stilwell, OK, for plaintiff.

Larry Derryberry and Patrick D. Shore, Oklahoma City, OK, and John R. Eldridge, III, Fayetteville, AR, for Ozarks.

Susan Brandon, Asst. U.S. Atty., Muskogee, OK, and Douglas J. Hughes, U.S. Dept. of Justice, Washington, DC, for U.S.

Patrick D. Shore and John R. Eldridge, III, Oklahoma City, OK, and Cynthia L. Garegnani, Asst. Gen. Counsel, Herndon, VA, for National.

ORDER

SEAY, Chief Judge.

This matter comes before the court on the motion for summary judgment filed by Ozarks Electric Cooperative Corporation ("Ozarks"). In its motion, Ozarks asserts that the attempted state law expropriation of its property by the City of Stilwell ("the City") is preempted under the Supremacy Clause of the United States Constitution because such expropriation would frustrate the purpose of the Rural Electrification Act ("REAct"), 7 U.S.C. § 901 et seq. The City has filed its response arguing for the application of the Oklahoma condemnation statutes. Neither the United States of America ex rel Rural Electrification Administration ("REA") nor the National Rural Utilities Cooperative Finance Corporation ("National") has taken a position in response to the City's motion. The REA has, however, filed with the court its September 20, 1994, Recommendation to the Administrator, which is the REA's final administrative decision concerning the City's proposed expropriation of Ozarks' facilities. Defendant United States' Notice of Administrative Decision (Docket No. 25, filed September 23, 1994). In its decision, the REA recommends that the Administrator not exercise his discretionary authority under section 907 of the REAct to withhold approval of the City's state law expropriation.

I.

On April 4, 1994, the City, a municipal corporation of the State of Oklahoma, filed an amended petition for condemnation and injunctive relief in the District Court of Adair County, Oklahoma, against Ozarks, REA and National.¹ Ozarks is an REA-financed rural distribution cooperative providing electrical power to its customers, including some who are located within the City's corporate boundaries. The City, which operates its own electrical transmission system for the benefit of its inhabitants, seeks to exercise its rights under Oklahoma law to condemn certain facilities and electricity consumers of Ozarks within an annexed portion of the City's corporate boundaries.² The City also seeks injunctive relief against Ozarks preventing it from extending or expanding its electrical facilities into the existing boundaries of the City. The REA and National have provided financing for Ozarks' operations and they are joined as defendants in this action because Ozarks, in order to secure such loans, has mortgaged its assets to them.³

II.

Ozarks is one of many nonprofit electric distribution cooperatives formed in response to the passage of the REAct in 1936. Congress enacted the REAct to counter the refusal of existing utilities to provide electric services to consumers in rural areas. The prevalent practice in the industry was to "skim off the cream" of the electric business in the densely populated areas of the country and leave the more remote areas without service. As a simple matter of economies of scale, existing utilities refused to extend electric service to rural America because it was costly and therefore unprofitable. The REAct was a direct response to this existing industry practice and it is the legislative mechanism which makes electric power available to rural America. Under the REAct, the REA was created and authorized to provide long-term, low interest loans to distribution cooperatives such as Ozarks to accomplish the objective of providing reliable electric service at affordable rates to rural communities across the country.

To enhance their ability to secure affordable, long-term electric power, distribution cooperatives banded together to form central generation and transmission cooperatives ("G & Ts"). The member distribution cooperatives and the G & Ts enter into long-term wholesale power contracts, or all-requirements contracts which provide that the members will purchase and receive from the G & Ts all or a portion of that particular member's energy requirements. This cooperative structure and the use of all-requirements contracts significantly foster the achievement of the central goals of the REAct:

with the all-requirements contracts in place, the G & T system provided a stable, interdependent network whereby the distribution cooperatives could pool their resources and band together to obtain power at wholesale prices, build central facilities, obtain favorable loans, and attempt to keep costs down.

Tri-State Generation & Transmission Association v. Shoshone River Power, Inc., 874 F.2d 1346, 1349 (10th Cir.1989). Ozarks is a member of KAMO Electric Cooperative Inc. ("KAMO"), a nonprofit G & T comprised of seventeen distribution cooperatives. Pursuant to wholesale power contracts extending through the year 2020, KAMO supplies electric power to its members who, in turn, provide retail electric power to customers in northeastern Oklahoma and southwestern Missouri.

The proposed expropriation by the City will financially impact both Ozarks and KAMO and, as a result, the integrated G & T system. By its actions, the City is attempting to "skim the cream" of Ozarks' most profitable consumers. As noted by the REA in its administrative decision:

Stilwell is seeking to obtain some of the highest density portions of Ozarks' Oklahoma service area. It is also the most economical and efficient part of the system and it provides Ozarks with a disproportionate share of its system margins (profits) ...

. . . . .

Ozarks has provided information which indicates that, although the 154 consumers proposed to be taken by Stilwell represent only 1.55 percent of the total 9,935 Oklahoma consumers, they represent a disproportionately high 9.32 percent of state total kWh sales, 6.57 percent of state total revenue and 6.97 percent of the state total operating margins. This indicates that the facilities and consumers being condemned represent some of Ozarks' highest density and highest margin-producing service area. This proposed "skimming the cream" by Stilwell will thus result in the remaining consumers in Oklahoma having to make up the difference by paying higher retail sales rates for the electric service they receive.

Administrative Decision, pp. 8, 10 and 11. After considering the impact the proposed expropriation would have on its security interests and on Ozarks' financial viability, the REA concluded that any adverse impact would be minimal and insufficient to recommend that the Administrator exercise his rights under section 907 of the REAct to withhold approval of the proposed expropriation. Administrative Decision, p. 15. In a more global sense, however, the REA did recognize that as a result of the proposed expropriation:

another benefit of the rural development efforts by Ozarks will not be realized since this action could discourage future rural development efforts by Ozarks and frustrate a congressionally mandated REA goal, to enhance the economic well being and growth of the rural community.

Administrative Decision, p. 10.

Given the structure of the integrated G & T system, the City's proposed expropriation would also impact KAMO's revenues and costs. The reduction in Ozarks' demand for electricity caused by the proposed expropriation would represent a loss of less than 1% of KAMO's member revenue. The increase in costs necessarily flowing from this lost revenue would be passed on to KAMO's members in both Oklahoma and Missouri. Administrative Decision, p. 8.

III.

Congress has the power to preempt state law under the Supremacy Clause of Article VI of the Constitution. The burden of establishing preemption is on Ozarks, who must show that state law providing for expropriation of its facilities and consumers is preempted by the REAct. See Arkansas-Platte & Gulf v. Van Waters & Rogers, 959 F.2d 158, 161 (10th Cir.), vacated on other grounds, ___ U.S. ___, 113 S.Ct. 314, 121 L.Ed.2d 235 (1992) (the burden is on the defendants to show that state tort claims based on failure to warn are preempted by the Federal Insecticide, Fungicide, and Rodenticide Act). Congressional action⁴ may give rise to preemption in several different ways: (1) Congress may express a clear intent to preempt state law, Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 1309-10, 51 L.Ed.2d 604 (1977); Louisiana Public Serv. Comm'n v. FCC, 476 U.S. 355, 368, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986); (2) Congress may choose to occupy a particular field by legislating in such a comprehensive manner that a reasonable inference can be made that Congress intended to remove the area from state regulatory authority, Pacific Gas & Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 1721-22, 75 L.Ed.2d 752 (1983); Evans v. Board of County Com'rs, 994 F.2d 755, 761 (10th Cir.1993); and (3) preemption may be inferred where state and federal law conflict, Pacific Gas & Electric Co., 461 U.S. at 204, 103 S.Ct. at 1722. This last area of conflict preemption may occur when "compliance with both federal and state regulations is a physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 (1963), when federal law implies a barrier to state regulation, Louisiana Pub. Serv. Comm'n, 476 U.S. at 368, 106 S.Ct. at 1898 (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 103 S.Ct. 2890, 77...