Wabash Valley Power Ass'n, Inc., Matter of

• Citation: 72 F.3d 1305
• Decision Date: 20 March 1996
• Docket Number: 94-3087,94-3088 and 94-3095,Nos. 94-3086,s. 94-3086
• Parties: , Util. L. Rep. P 14,076, Bankr. L. Rep. P 76,739 In the Matter of WABASH VALLEY POWER ASSOCIATION, INCORPORATED, Debtor-Appellee. Appeal of UNITED STATES of America, on Behalf of the RURAL ELECTRIFICATION ADMINISTRATION.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1305

72 F.3d 1305

64 USLW 2479, Util. L. Rep. P 14,076, Bankr. L.

Rep. P 76,739

In the Matter of WABASH VALLEY POWER ASSOCIATION INCORPORATED, Debtor-Appellee Appeal of UNITED STATES of America, on Behalf of the RURAL ELECTRIFICATION ADMINISTRATION.

Nos. 94-3086, 94-3087, 94-3088 and 94-3095.

United States Court of Appeals Seventh Circuit.

Argued Feb. 23, 1995.

Decided Dec. 28, 1995.

As Amended on Denial of Rehearing and Suggestion for

Rehearing En Banc March 20, 1996.

Jeffrey L. Hunter, Office of the United States Attorney, Indianapolis, IN, J. Christopher Kohn, James G. Bruen, Jr., Andrea Larry, John Stemplewicz (argued), Department of Justice, Civil Division, Washington, DC, for U.S.

Robert K. Johnson, Robert M. Glennon, Office of Utility Consumer Counselor, Indianapolis, IN, Jay P. Kennedy, James A. Knauer, Kroger, Gardis & Regas, Indianapolis, IN, for Office of Utility Consumer Counselor.

Frank J. Kelley, Thomas L. Casey, Office of the Attorney General, Lansing, MI, for State of Michigan and Michigan Public Service Commission.

James T. Malysiak, Lee A. Freeman, Jr. (argued), John F. Kinney, Freeman, Freeman & Salzman, Chicago, IL, James P. Moloy, David Kleiman, Dann, Pecar, Newman, Talesnick & Kleiman, Indianapolis, IN, Charles W. Ritz, III, Don F. Morton, Parr, Richey, Obremskey & Morton, Indianapolis, IN, for Wabash Valley Power Association, Incorporated.

Before CUDAHY, COFFEY and MANION, Circuit Judges.

CUDAHY, Circuit Judge.

This case had its origins in the cancellation of a partially completed nuclear power plant--the Marble Hill project in Jefferson County, Indiana. The Marble Hill project was undertaken by Public Service Company of Indiana (now PSI Energy, Inc.) (PSI). Wabash Valley Power Cooperative (Wabash), a generation-and-transmission cooperative serving 24 rural electric membership cooperatives (Members or distribution co-ops) purchased a 17% interest in the project. It borrowed the funds for this purpose with the aid of a loan guarantee from the Rural Electrification Administration (REA). After an expenditure of $2.9 billion, PSI decided to cancel the Marble Hill project in 1984. At that time, Wabash had invested $460 million in the defunct plant. Upon the cancellation, Wabash filed suit against PSI (83% owner of Marble Hill) and the architect-engineer of the project, Sargent and Lundy Engineers (S & L).

At that point the problem was similar to that presented elsewhere by other nuclear plant abandonments or cost overruns. Who pays: the stockholders of an investor-owned utility, the ratepayers of almost any utility or, if there is very little or no equity (as may be the case with a cooperative utility), the secured and unsecured creditors? For example, in the case of the extremely costly Seabrook Plant, jointly owned by Public Service Company of New Hampshire, the stockholders and ratepayers shared the burden of the company's bankruptcy. The company obtained a rate increase covering only a fraction of the Seabrook Plant's cost overruns. In re Public Serv. Co., 114 B.R. 820 (Bankr.D.N.H.1990). In the case of the Shoreham Plant on Long Island (owned by the Long Island Lighting Company), the ratepayers apparently contributed something by way of a series of rate increases to keep the company out of bankruptcy when the plant was decommissioned. Citizens for an Orderly Energy Policy, Inc. v. Cuomo, 159 A.D.2d 141, 559 N.Y.S.2d 381 (1990), aff'd 78 N.Y.2d 398, 576 N.Y.S.2d 185, 582 N.E.2d 568 (1991). In the Duquesne Light Company case, the Pennsylvania Commission allowed amortization over a ten-year period of the sunk costs of certain abandoned nuclear plants, but the Pennsylvania Supreme Court reversed on the grounds that the plants were never used and useful in the public service. Barasch v. Pennsylvania Public Util. Comm'n, 516 Pa. 142, 532 A.2d 325 (1987), aff'd sub nom. Duquesne Light Co. v. Barasch, 488 U.S. 299, 109 S.Ct. 609, 102 L.Ed.2d 646 (1989). The utility company then appealed to the United States Supreme Court, claiming confiscation, but the Court affirmed, primarily on the ground that the same impact on allowable revenue could have been achieved by a small adjustment in the allowed rate of return on equity. Duquesne Light Co. v. Barasch, 488 U.S. 299, 109 S.Ct. 609, 102 L.Ed.2d 646 (1989). Following the principle established in Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944), the Court held that the particular route followed in the ratemaking process did not raise constitutional problems so long as the "end result" was fair. Thus, commissions and courts have followed differing paths in accounting for defunct or high-cost nuclear plants.

In the present case, at the time of the Marble Hill cancellation Wabash attempted to restructure its REA indebtedness and, at REA's insistence, filed for a 51% electric rate increase before the Indiana Utility Regulatory Commission (the IURC) (formerly the Public Service Commission of Indiana). This rate hike was denied based on Citizens Action Coalition, Inc. v. Northern Indiana Public Service Co. (NIPSCO), 485 N.E.2d 610 (Ind.1985), cert. denied, 476 U.S. 1137, 106 S.Ct. 2239, 90 L.Ed.2d 687 (1986) which had denied a similar increase to NIPSCO on the grounds that a canceled plant was not "used and useful" in the public service. In re Wabash Valley Power Ass'n, Inc., Cause No. 37472, 1987 WL 257474, 1987 Ind. PUC LEXIS 415 (Ind.Pub.Serv.Comm'n 1987). On appeal, the Indiana Supreme Court reaffirmed the principles enunciated in its NIPSCO decision, denying the rate increase on the ground that Marble Hill had never become used and useful in the public service. National Rural Utils. Coop. Fin. Corp. v. Public Serv. Comm'n, 552 N.E.2d 23 (Ind.1990).

Cut off from relief at the hands of Indiana regulators and courts, REA sought to preempt state law and to take the rate increase decision into its own hands. It tried to do this first by a letter directed to Wabash and later by a notice-and-comment rulemaking. These efforts at preemption were rejected by this court, in its decisions in Wabash Valley Power Ass'n v. Rural Electrification Admin., 903 F.2d 445, 452-54 (7th Cir.1990) (Wabash I ) and Wabash Valley Power Ass'n v. Rural Electrification Admin., 988 F.2d 1480, 1488-91 (7th Cir.1993) (Wabash II ), respectively. It is important to an understanding of the difficult bankruptcy questions involved here that all the efforts of REA to recoup its defaulted loan through a Wabash rate increase have failed and that there appears to be no further recourse in this direction, except arguably for a 4% "viability" increase to finance the reorganization plan approved by the bankruptcy court here.

In this connection, we note that Wabash has 22 Member distribution cooperatives in Indiana, organized as not-for-profit corporations, pursuant to the Indiana Rural Electric Membership Corporation Act, Ind.Code Secs. 8-1-13-1 et seq. (1995). Wabash itself was formed under the Indiana Not-For-Profit Corporation Act, Ind.Code Secs. 23-7-1-1 et seq. (repealed 1971, similar provisions now at Secs. 23-17-1-1 et seq.). As a not-for-profit corporation Wabash cannot pay any earnings or dividends to its members, and upon dissolution any assets remaining after payment of debts escheat to the state. Ind.Code Sec. 23-17-30-1 (1995). Wabash also has one Member cooperative in Michigan and one in Ohio. Each Member is owned and controlled by its customers, retail buyers of electricity. Wabash was formed in 1962 to provide its Members with a reliable and reasonably priced wholesale power supply. Wabash is governed by a Board consisting of one director from each of its 24 Members. Before Wabash began supplying its Members with electric power, the Members received power directly from one of four adjacent investor-owned utilities--PSI, Northern Indiana Public Service Company (NIPSCO), Indianapolis Power and Light Company (IPL) and Indiana & Michigan Electric Company (I & M) (the IOUs).

In 1977, Wabash entered into 40-year wholesale power requirements contracts with its Members (the Supply Contracts) and subsequently took an assignment of the Members' existing power supply contracts with the adjacent IOU's. The Supply Contracts provide that (1) Wabash's rates shall produce revenues sufficient, but no more than sufficient, to pay operating expenses, taxes, etc., and to provide reasonable reserves; (2) rates must be pre-approved by the Wabash Board (which represents the Members); and (3) all rate requests are "subject to the approval" of the Indiana Commission. ¹ The IURC requires any excess of Wabash's revenues over its expenses and replacements to be credited to its Members.

As noted, efforts to restructure the REA indebtedness following the cancellation of Marble Hill were unsuccessful, and in 1985 the United States Department of Justice asserted the possibility of personal liability of the Wabash directors. Shortly thereafter, Wabash filed under Chapter 11 of the Bankruptcy Code. As of the bankruptcy Petition Date, Wabash owed REA approximately $130 million related to non-Marble Hill assets and about $540 million related to Marble Hill for a total of $669,058,454.25 in principal and interest.

Subsequent to the Petition Date, Wabash voluntarily paid REA $36,444,964.22 in non-Marble Hill debt service payments. After June of 1988 Wabash made these debt service payments into an escrow account entitled the Timbers Account. In 1990, pursuant to an order of the bankruptcy court, Wabash paid REA an additional $28,928,693.22 from the Timbers Account. Order Granting United States' Motion for Abandonment of Monies in Escrow Account, Bankr.Rec.Doc. 6 (hereinafter Timbers Order). As of the Petition Date, Wabash also owed about $35 million to the National Rural Utilities Cooperative Finance Corporation (CFC), of which about $12 million has been paid. The REA debt and most of the CFC debt are secured by a pre-petition joint mortgage and...