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New York State Electric & Gas Corp. v. Federal Energy Regulatory Commission

decided: September 30, 1980.

NEW YORK STATE ELECTRIC & GAS CORPORATION, PETITIONER,
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT, VILLAGE OF PENN YAN, NEW YORK, MUNICIPAL ELECTRIC UTILITIES ASSOCIATION OF NEW YORK STATE, INTERVENORS.



Petition to review orders of the Federal Energy Regulatory Commission which required respondent to file contracts with the Commission, and declared certain provisions of the contracts invalid. Affirmed in part, vacated in part and remanded.

Before Van Graafeiland and Kearse, Circuit Judges, and Goettel, District Judge.*fn*

Author: Kearse

This is a petition by New York State Electric & Gas Corporation ("NYSEG") for review of orders of the Federal Energy Regulatory Commission (the "Commission"), invalidating certain provisions in contracts entered into by NYSEG with, respectively, the Power Authority of the State of New York ("PASNY") and the Village of Penn Yan, New York ("Penn Yan" or the "Village") on the grounds that the provisions violated federal antitrust policy. NYSEG contends that the orders should be vacated because the Commission lacked jurisdiction over the contracts in question, because principles of state immunity make federal antitrust policy inapplicable, and because the Commission failed to comply with pertinent provisions of the Federal Power Act ("FPA").

We conclude that the Commission has jurisdiction to require the filing and modification of the challenged contracts, but that a hearing should have been held in order for the Commission to assess the public interest in those contracts and that the Commission's orders, without complying with statutory requirements, require the provision of transmission services, known as "wheeling," within the meaning of § 211 of the FPA. Accordingly, we vacate the orders and remand to the Commission for proceedings consistent with §§ 206, 211 and 212 of the FPA.

I. FACTUAL BACKGROUND*fn1

A. The Parties and the Contracts

NYSEG is a New York corporation engaged in the generation, purchase, transmission and wholesale and retail distribution of electric power and energy. It is a public utility subject to the provisions of the FPA; it provides transmission services to PASNY and sells or has sold power to Penn Yan and other communities.

Village of Penn Yan is a municipal corporation located in Yates County, New York. It owns an electric utility, Penn Yan Municipal Board, which is a wholesale purchaser and retail distributor of electric energy. References to "Penn Yan" include its electric utility.

PASNY is "a political subdivision" of New York State which is responsible for helping to maximize "beneficial use" of the Niagara and St. Lawrence Rivers, including the development of hydroelectric power. N.Y.Pub.Auth.Law §§ 1002, 1001 (McKinney 1970 & Supp.1979-1980). Under the New York Power Authority Act, PASNY is directed and authorized, inter alia, to "make provision so that municipalities and other political subdivisions of the state ... may secure a reasonable share of the power generated" by the Niagara and St. Lawrence hydroelectric projects, and to construct or acquire, by contract, the use of transmission lines to conduct electricity to purchasers. N.Y.Pub.Auth.Law §§ 1005.5, 1005.7 (McKinney Supp.1979-1980). PASNY generates energy at the Niagara Power Project and sells that power on a wholesale basis to NYSEG and to other customers by means of transmission lines furnished by NYSEG.

The Commission, successor to the Federal Power Commission,*fn2 has jurisdiction over all facilities for "the transmission of electric energy in interstate commerce and ... the sale of electric energy at wholesale in interstate commerce." FPA § 201, 16 U.S.C. § 824(b) (1976). It has the power to identify and remedy certain unjust or unreasonable rates, charges or contracts of public utilities. FPA § 206, 16 U.S.C. § 824e (1976).

The present proceeding involves a 1961 contract between NYSEG and PASNY, referred to as NS-11, and a 1962 agreement between NYSEG and Penn Yan. The controversy arises out of the desire of Penn Yan for a modification of those contracts.

The 1961 contract between NYSEG and PASNY, NS-11, recited PASNY's intention "to enter into agreements ... for the sale, transmission and distribution of power and energy from the (Niagara hydroelectric power development) Project with municipalities and rural electric cooperatives operating electric systems serving rural and domestic consumers within (PASNY's) Niagara market area," and provided that NYSEG would maintain "transmission facilities capable of transmitting Project power within the limits herein provided to such prospective purchasers from (PASNY)." The contract further provided that NYSEG would accept delivery of Project power "into its electric transmission system ... and ... deliver an equivalent amount of electric power and energy ... to (PASNY) for its own use or for municipalities and rural electric cooperatives." Article X, Paragraph 3 of NS-11, limited NYSEG's obligation to deliver power for PASNY as follows:

The electric power and energy to be delivered by (NYSEG) to (PASNY) for customers from the system of (NYSEG) will be limited to such electric power and energy as is necessary for the use, distribution and resale within the area limits served as of the date hereof by the Villages of Bath, Castile, Endicott, Greene, Groton, Marathon, Penn Yan, Silver Springs and Watkins Glen, Chautauqua-Cattaraugus Electric Cooperative, Inc. and Steuben Rural Electric Cooperative, Inc., and for such other loads and customers of (PASNY) as may be mutually agreed upon from time to time.

(Emphasis added.) Thus, the NYSEG agreement with PASNY did not obligate NYSEG to transmit Project power for the use of any area annexed to Penn Yan after 1961.

In 1962, NYSEG and Penn Yan entered into a contract which terminated a 1956 agreement pursuant to which Penn Yan had been a wholesale purchaser of power from NYSEG. In the 1956 contract, Penn Yan had agreed to purchase from NYSEG all of the electrical energy required within the existing territorial limits of the Village and its franchise area for a 10-year period. In 1962, however, Penn Yan decided to purchase its power from PASNY instead of NYSEG, and so notified NYSEG. NYSEG took the position that this would constitute a breach of the 1956 agreement and would result in damages to NYSEG in the amount of $95,910.48. Penn Yan decided to pay NYSEG this amount to buy out of the 1956 agreement. Reciting (a) that Penn Yan "believe(s) that it is to its financial advantage to obtain its electrical energy requirements" from PASNY, (b) that the required energy to be supplied to PASNY could be delivered through NYSEG's transmission facilities "under an appropriate contract" between NYSEG and PASNY, and (c) that NYSEG "has entered into an agreement with (PASNY) for the delivery by (NYSEG) of such power and energy as is necessary for the use, distribution and resale within the area limits served as of February 10, 1961" by Penn Yan, the 1962 agreement terminated the 1956 agreement, required Penn Yan to pay NYSEG $95,910.48 in settlement of its claims, freed Penn Yan to contract with PASNY for supply of Penn Yan's energy needs, and required NYSEG to continue to supply Penn Yan with energy until such time as PASNY commenced to do so. Paragraph 3 of this agreement, however, included the following limitation:

(Penn Yan) will take from (PASNY) under such contract only such electric energy required by the Village within the territorial limits, as of February 10, 1961, of the Village and its franchise area outside the Village as approved by the Public Service Commission of the State of New York, (a) for its own use, and (b) for distribution and resale to its existing and future customers.

This territorial limit was identical (with the exception, of course, of the date) to the limit provided in the 1956 agreement, and corresponded to the limit on NYSEG's obligation to transmit PASNY energy as set out in Article X, Paragraph 3 of NS-11.

In 1967, Penn Yan annexed an area known as Excell Estates, which had been part of the Town of Milo, a customer of NYSEG. Three years later, Penn Yan sought a modification of the 1962 agreement to permit the Village to serve as distributor to residential customers in Excell Estates. NYSEG denied the request, noting that "Paragraph 3 of (the 1962) Agreement was specifically designed to preserve the territorial integrity of (NYSEG's) franchise area as of February 10, 1961."*fn3 In March 1978, Penn Yan again requested a modification to enable it to supply power to Excell Estates. Again NYSEG refused.

B. Proceedings Before the Commission

On May 25, 1978, Penn Yan filed with the Commission a petition for a declaratory order invalidating Article X, Paragraph 3 of NS-11 insofar as it limited the territories of Penn Yan and other communities to which NYSEG was required to transmit power for PASNY. The petition claimed, inter alia, that the contract provision violated the Niagara Redevelopment Act of 1957 ("NRA") and the FPA, as well as state and federal public policy. Penn Yan subsequently moved to compel the filing by NYSEG of the 1962 agreement, and sought a declaration that Paragraph 3 of that agreement also was unenforceable.

On July 20, 1978, NYSEG sought to intervene in the proceeding on Penn Yan's petition and opposed the petition on various grounds. In addition to challenging the jurisdiction of the Commission under the FPA and the NRA, NYSEG contended that neither its 1961 contract with PASNY nor its 1962 contract with Penn Yan attempted to restrict the area that Penn Yan could serve or the amount of power that Penn Yan could obtain from PASNY. The petition stated that

NYSEG has declined to further modify its transmission obligation under NS-11 Paragraph 3 ... because, in the exercise of sound business judgment, NYSEG has determined that it would not be in the public or its corporate interest ... when the result would be an unwarranted duplication of electric service in Excell Estates.

In addition, the petition contended that "(t)he relief requested by Penn Yan, if granted, would only result in the Commission compelling NYSEG to "wheel' power involuntarily for a direct competitor,"*fn4 and NYSEG argued that neither the FPA nor the NRA requires NYSEG to provide unlimited transmission services.

After receiving the above petitions, as well as comments from PASNY*fn5 and several supplementary filings by Penn Yan and NYSEG, but without holding a hearing, the Commission, on March 28, 1979, rejected all of NYSEG's arguments and declared Article X, Paragraph 3 of NS-11, along with Paragraph 3 of the NYSEG-Penn Yan agreement and any similar NYSEG agreements with other customers, unenforceable.*fn6 As to its jurisdiction, the Commission stated:

Under Section 201(b) of the Federal Power Act, a jurisdictional utility is one which sells or transmits electric energy at wholesale in interstate commerce. Therefore the 1962 Agreement and the provision of the NS-11 contract which provide for NYSEG transmission of PASNY power at wholesale to Penn Yan are contracts subject to our jurisdiction. While PASNY is exempt from our jurisdiction as a public authority under Section 201(f), NYSEG is a jurisdictional utility and must file these contracts under Section 205(c).

Declaratory Order Modifying Jurisdictional Contracts ("Order"), Docket No. EL78-29 (March 28, 1979) at 4. As to the reasonableness of the challenged contract provisions, the Commission found those provisions to be a direct resale prohibition which served to "protect NYSEG from competition for retail customers and to restrict Penn Yan's ability to extend its municipal system, thereby impairing and diminishing competition to serve retail customers in the extended territories." Characterizing NYSEG's petition as admitting an anticompetitive purpose, the Commission ruled that the provisions violated federal antitrust policy. Finally, as to NYSEG's argument that the requested modification of the contracts would result in an order compelling wheeling, the Commission pointed out that NS-11 itself obligates NYSEG to wheel, and that the challenged provision of NS-11 places restrictions on the purchasers' use of wheeled power. Thus, the Commission characterized its order as one that removes a contractual restriction on the use of wheeled power rather than as one that actually compels wheeling.

On April 24, 1979, NYSEG sought a rehearing, again urging, inter alia, that the removal of the territorial limitations resulted in an order compelling wheeling, and arguing that, although such an order was within the Commission's authority under newly enacted statutory provisions,*fn7 there had been no compliance with the substantive or procedural requirements of those provisions, FPA §§ 211, 212, 16 U.S.C.A. §§ 824j, 824k (Supp.1980). In addition, NYSEG argued that the Commission lacked authority to issue the orders in question because PASNY has sole authority to determine the reasonableness of its contracts and because the challenged provisions were protected from antitrust scrutiny by state action immunity.

After an initial order granting rehearing for the limited purpose of reconsideration, the Commission denied the application for rehearing, again rejecting all of NYSEG's contentions.*fn8 The Commission reiterated its view that the order did not compel wheeling and concluded, therefore, that §§ 211 and 212 were inapplicable. In addition, it ruled that no evidentiary hearing was needed since "the pleadings and the contracts themselves provide a sufficient factual basis for the Commission's finding that the disputed provision is anticompetitive in effect and ...


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