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Power Authority v. Federal Energy Regulatory Commission

decided: August 15, 1984.

POWER AUTHORITY OF THE STATE OF NEW YORK, PETITIONER,
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; NIAGARA MOHAWK POWER CORPORATION, PETITIONER, V. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; NEW YORK STATE ELECTRIC & GAS CORPORATION, PETITIONER, V. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; MUNICIPAL ELECTRIC UTILITIES ASSOCIATION OF NEW YORK, STATE OF NEW YORK PUBLIC SERVICE COMMISSION, EXPANSION POWER INDUSTRIES, METROPOLITAN TRANSPORTATION AUTHORITY, MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY, CONNECTICUT MUNICIPAL ELECTRIC ENERGY COOPERATIVE, BETHLEHEM STEEL CORP., GENERAL MOTORS CORP., OCCIDENTAL CHEMICAL CORP., HOOKER INDUSTRIAL & SPECIALTY CHEMICALS, OLIN CORP. AND UNION CARBIDE CORP., VERMONT DEPARTMENT OF PUBLIC SERVICE, BOROUGH OF LANSDALE, PENNSYLVANIA, CONSOLIDATED EDISON COMPANY OF NEW YORK, PORT AUTHORITY OF NEW YORK AND NEW JERSEY, INTERVENORS



Petition for review of a series of orders issued by the Federal Energy Regulatory Commission concerning the allocation of inexpensive hydroelectric power from the Niagara Power Project. Petitioners claim that the Commission (1) misconstrued the relevant provisions of the Niagara Redevelopment Act, 16 U.S.C. §§ 836-836a, (2) erred in finding a violation of that Act, (3) violated the due process right of the Power Authority of the State of New York, (4) acted arbitrarily and improperly in directing that certain relief be granted, and (5) issued an order that was irreparably tainted by improper ex parte contacts. The Commission's orders are modified in some respects relating to relief but are in all other respects affirmed.

Lumbard, Mansfield and Winter, Circuit Judges.

Author: Mansfield

MANSFIELD, Circuit Judge:

Petitions have been filed by various parties to this proceeding for review of a series of decisions of the Federal Energy Regulatory Commission ("FERC", or "the Commission") concerning the allocation of inexpensive hydroelectric power from the Niagara Power Project.*fn1 The project is administered by the Power Authority of the State of New York ("PASNY"), a New York State agency, under a license from FERC. The federal legislation that created the Niagara Power Project, the Niagara Redevelopment Act, 16 U.S.C. §§ 836-836a (the "Act" or "NRA"), requires that in disposing of 50% of the power generated by the project the licensee should give preference to public bodies and non-profit cooperatives; that requirement is in turn a condition of PASNY's license. This case is essentially a dispute over whether PASNY allocated sufficient power in 1960-61 to these " preference customers", i.e., municipalities or cooperative electric systems as distinguished from private investor-owned utilities (e.g., Niagara Mohawk Power Corporation, New York State Electric & Gas Corporation, Rochester Gas and Electric Corporation).

In May 1978 the Municipal Electric Utilities Association (MEUA), which represents the preference customers, filed a complaint alleging that they had not received all the preference power to which they were entitled; PASNY denied that that was the case. After a series of orders FERC eventually found a middle ground. The Commission agreed that PASNY had failed to fulfill the requirements imposed by its license to meet the "reasonably foreseeable" needs of preference customers when it forecast those needs in 1960-61. However, it also found that PASNY had nevertheless managed to provide MEUA members with enough equivalently priced hydropower from the St. Lawrence Project, which is also administered by PASNY, to meet MEUA's needs through mid-1985; thus, the Commission ruled that no remedy was needed before 1985. For the period following 1985, however, FERC declared void PASNY's contracts with the private utilities and ordered it to supply additional power to MEUA from the Niagara Power Project.

Both PASNY (along with the three private, non-preference utilities to which it sells power) and MEUA seek review.*fn2 PASNY contends that FERC has allocated to MEUA an excessive amount of power, while MEUA claims that FERC has failed to allocate to it all the power to which it is entitled. Both sides raise a barrage of statutory, procedural and equitable considerations in support of their respective positions. We modify FERC's remedy for the post-1985 period to make it consistent with the pre-1985 remedy and direct that if a modification of PASNY's contracts with the private utilities becomes necessary, so-called "expansion power" is not to be exempted from withdrawal for preference customers. We affirm the Commission's orders in all other respects.

BACKGROUND

An understanding of the factual and legislative history of the Niagara Power Project is necessary for consideration of the legal questions presented by this petition. The project can be traced back to 1950, when the United States and Canada signed a treaty providing for expanded use of the Niagara River for hydropower generation. In contrast to the rapid development undertaken by the Canadians, Congress considered several bills during the 1950's but made little progress. The impasse was due to a dispute over whether the river constituted a national or a state resource. Both New York and the federal government already had established power agencies in place. PASNY had been created as an agency of the State of New York in 1931 to develop the St. Lawrence Power Project. See generally New York Public Authorities Law §§ 1000, et seq. FERC's predecessor, the Federal Power Commission, had been in existence since 1920, when it was created by the Federal Water Power Act. 16 U.S.C. §§ 791, et seq.*fn3

The need to develop the Niagara River took on new urgency when the Schoellkopf generating station located at Niagara Falls was destroyed by a rock slide on June 7, 1956. Power was restored to the region only by importing Canadian power at high rates, thereby threatening the viability of Northern New York State's industry, much of which was defense-related. By 1957, two bills were introduced in the Senate, both of which provided for development of the project by PASNY under a license from the Commission. Senator Clark of Pennsylvania introduced S. 512, which was characterized by a "federal preference," such as that contained in the TVA and Bonneville Power Projects. A "federal preference" requires that the project power be sold to rural cooperatives and municipal utilities, on the theory that the price charged by those bodies will provide a "yardstick" that will force down the rates charged by private utilities to domestic and rural consumers. The alternative bill, S. 1037, was introduced by Senators Ives and Javits of New York. Rather than create a "yardstick" as a means of indirectly benefiting consumers, the Ives/Javits bill contained a "state preference" under which priority was given directly to consumers as end-users. That bill was drafted to conform with New York law, which requires that PASNY:

develop, maintain, manage, and operate those parts of the . . . projects . . . in such manner as to give effect to the policy hereby declared . . . that in the development of hydro-electric power . . . such projects shall be considered primarily as for the benefit of the people of the state as a whole and particularly the domestic and rural consumers to whom the power can economically be made available, and accordingly that sale to and use by industry shall be a secondary purpose, to be utilized principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates and in such manner as to encourage increased domestic and rural use of electricity.

New York Public Authorities Law § 1005(5). For a more detailed discussion of the two bills and their historical setting, see Development of Power at Niagara Falls, N.Y.: Hearings on S. 512 and S. 1037 Before a Subcommittee of the Committee on Public Works, 85th Cong., 1st Sess. (1957) (hereinafter "1957 Senate Hearings").

Following hearings on the two bills, the Senate Public Works Committee reported out a compromise bill, S. 2406. An identical bill, H.R. 8643, was enacted into law on August 21, 1957. The preference that resulted was as follows:

In order to assure that at least 50 per centum of the project power shall be available for sale and distribution primarily for the benefit of the people as consumers, particularly domestic and rural consumers, to whom such power shall be made available at the lowest rates reasonably possible and in such manner as to encourage the widest possible use, the licensee in disposing of 50 per centum of the project power shall give preference and priority to public bodies and non-profit cooperatives within economic transmission distance. In any case in which project power subject to the preference provisions of this paragraph is sold to utility companies organized and administered for profit, the licensee shall make flexible arrangements and contracts providing for the withdrawal upon reasonable notice and fair terms of enough power to meet the reasonably foreseeable needs of the preference customers.

Pub. L. No. 85-159, § 1(b)(1), 71 Stat. 401, codified at 16 U.S.C. § 836(b)(1). The statutory language was adopted verbatim as Article 20 of the license issued by FERC to PASNY to construct and operate the Niagara Project.

PASNY immediately set about constructing the project, which was privately financed; PASNY floated several large bond issues to raise the necessary $700 million. The Niagara Project went into service on February 10, 1961, with a dependable capacity rated at 1800 Megawatts (MW). An intertie with the St. Lawrence Project provided another 200 MW.

PASNY then made efforts to sell the 1800 MW of power generated by the project. The municipal utilities and other preference customers, which already were using 86 MW furnished by PASNY from the St. Lawrence Project, had very limited immediate need for additional power, see 1957 Senate Hearings, supra, at 73-74. The private utilities which likewise were not looking for an immediate increase in their capacity and would not gain any significant cost advantage by switching to Niagara Project power, were attracted to it only if it were made firmly available on a long-term basis. The non-preference utilities were therefore unwilling to incur the heavy cost and risk involved in committing themselves for large additional amounts of Niagara Project power in the initial years unless they could balance this short-term cost increase by obtaining from PASNY a long-term stable source of non-withdrawable power at a competitive price that might later be used to meet a hoped-for increase in demand.

Faced with this market situation PASNY estimated in 1960 that the preference customers would have an immediate use for no more than an additional 75 MW of Niagara Project power and that by 1985, using a 6.2% annual growth factor, their overall needs for this power would be no more than 411 MW, or 325 MW more than the 86 MW supplied from the St. Lawrence Project. PASNY therefore contracted with the preference customers to supply them with the 75 MW they needed and with the non-preference private utilities to sell them the balance of the Niagara Project power until January 1, 1990, on the following terms: 600 MW on a "non-withdrawable" basis*fn4 over the full term of the contracts and 430 MW on a "withdrawable" basis, i.e., reserving the right to withdraw the power for sale to preference customers. 250 MW of this withdrawable power was on demand to be surrendered by the private utilities to MEUA's members, i.e., preference customers in New York, and the balance of 180 MW to be available for public bodies in neighboring states.

In addition, PASNY, as required by § 1(b)(3) of the NRA, agreed to supply Niagara Mohawk Corporation, a private utility, with 445 MW of power to replace power generated from the Schoellkopf plant formerly located on the Niagara River. This "replacement power" is not an issue in this appeal. These contracts made by PASNY for sale of the power to be produced by the project and the projections on which they were based were made public on August 3, 1960. The contracts were approved by Nelson A. Rockefeller, Governor of New York, after opportunity for public comment, as provided by New York's Public Authorities Law § 1009, and became effective when the project started operating on February 10, 1961. No one complained at that time that PASNY's projection for preference needs was made for only 25 years, i.e., until 1985, whereas the contracts with the private, non-preference customers were to continue in effect for 29 years, i.e., until the end of 1989, which was 4 1/2 years beyond the preference projection. The reason for lack of concern over this difference was that in 1960-61 everyone believed that there would be more than enough power available from the project for preference customers throughout the entire 29-year period. Indeed, MEUA, which now attacks the 1960-61 allocation of power to non-preference customers, then testified in favor of PASNY's contracts with these customers and passed a resolution "unanimously commending" its action.

With the aid of 20-20 hindsight it is now apparent that PASNY's 1960-61 predictions were inaccurate. In its inception the Niagara Project was seen primarily as a source of energy for a region that had been underserved. What no one foresaw (or could foresee) at the time was that the 1973 oil embargo, which drastically increased the price of fossil fuels, followed by double-digit inflation would suddenly make hydropower a prized commodity. By the mid-1970's large numbers of industrial customers, attracted by the now relatively low-cost power in the Niagara region, moved into the area, many of them purchasing their hydropower from PASNY's preference customers. By the time of the 1979-80 hearing before the ALJ in this case, preference customers were selling 58% of their hydropower to industrial and commercial users.

Thus PASNY's 1960-61 projections for preference customers proved to be vastly insufficient. The 250 MW of withdrawable power sold to the private utilities were diverted to preference customers but proved to be insufficient to meet the latter's needs. PASNY then diverted non-Niagara hydropower to MEUA, providing it with an additional 136.2 MW of St. Lawrence power, which sells at the same low rates as Niagara power. On April 18, 1978, however, PASNY informed MEUA that it had exhausted its supplies of hydropower, that PASNY would not abrogate its existing 1961 contracts with the private utilities for the purpose of diverting additional power to preference customers, and that any additional demand by preference customers would be fulfilled with power from PASNY's next-cheapest source, the FitzPatrick nuclear plant, from which power was later sold to MEUA's members, beginning on October 28, 1979.

On May 12, 1978, MEUA filed its complaint against PASNY with FERC, claiming that PASNY was obligated by the terms of its license to furnish preference customers with up to 50% of the Niagara Project's capacity despite its 1961 forecast and entry into long-term contracts to furnish a portion of that 50% to non-preference utilities until 1990.

In the first of its seven orders in this case, FERC on November 2, 1979, consolidated MEUA's complaint with a separate action against PASNY by the Village of Ilion, which had been denied 7 MW of power that it proposed to resell to the Remington Arms Company. In that first order, FERC interpreted the governing provisions of the NRA, and hence of PASNY's license, as follows:

As we view Section 1(b)(1) of the NRA and Article 20, the natural reading is that PASNY must assess the reasonably foreseeable needs of preference customers at the time that it contracts to sell preference power to a non-preference customer. Then it is only obliged to provide for withdrawal of enough power to meet those needs. The preference power that is not reasonably foreseen to be necessary for preference customers during the life of the contract can then be sold to ...


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