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March 11, 1992



The opinion of the court was delivered by: JOHN T. CURTIN


 There are no facts in dispute. Although the court set out the facts in its prior order, Occidental Chem. Corp. v. Power Auth. of the State of New York, 758 F. Supp. 854, 856-57 (W.D.N.Y. 1991) ("OCC v. PASNY"), given the importance of the issue here, an outline of those facts is again necessary. See also Federal Power Comm'n v. Tuscarora Indian Nation, 362 U.S. 99, 100-06, 80 S. Ct. 543, 4 L. Ed. 2d 584 (1960) (detailing history surrounding passage of NRA).

 Prior to the enactment of the NRA by Congress on August 31, 1957, a private utility--the Niagara Falls Power Company ("NFPC"), predecessor company of the Niagara Mohawk Power Corporation ("Niagara Mohawk")--controlled the hydroelectric power-generating capabilities of the Niagara River. Around the turn of the century, NFPC built two hydroelectric facilities on the Niagara: the Adams Plant and the Schoellkopf Station. The Adams Plant generated approximately 80,000 kilowatts ("kW"), and the Schoellkopf Station generated approximately 365,000 kW. In the beginning, NFPC obtained water flow to support these facilities from grants issued by the New York State legislature. After 1909, however, when Canada and the United States signed the Boundary Waters Treaty, the diversion of water from the Niagara for power generation was governed by international agreement. Then, with the passage in 1920 of the Federal Water Power Act, NFPC was required to obtain a federal license for its Niagara facilities. NFPC obtained a fifty-year license from the Federal Power Commission ("FPC") on March 2, 1921. 1 F.P.C. 16 (Item 43, Exhs. 12-14). *fn1" As this was the sixteenth license issued by the newly formed FPC, NFPC's twin hydroelectric plants came to be known as Project 16. NFPC was granted additional small allocations of water in 1926 and 1928, see Item 43, Exhs. 13-14, and a larger allocation in 1941, after an agreement between the United States and Canada to divert more water for hydroelectric power generation. See 2 F.P.C. 461 (Item 43, Exh. 28).

 In 1950, the United States and Canada signed a new treaty ("1950 Treaty") which authorized the United States to divert a larger portion of water from the river than Niagara Mohawk could utilize at its twin hydroelectric plants. 1 U.S.T. 694. *fn2" During ratification, the United States Senate attached a reservation to this treaty which prohibited redevelopment of the Niagara River without express Congressional authorization. Id. at 699. The enactment of this reservation precipitated a seven-year debate in Congress over how to best develop and allocate hydroelectric power from the Niagara resource. Three main questions occupied Congress: (1) Should public bodies and nonprofit cooperatives be given preference to Niagara power and, if so, what form should the preference clause take?; (2) How much power, if any, should be reserved for preference customers in adjacent states?; and (3) Who should be licensed to develop the Niagara resource--a private utility, PASNY, or the federal government? Only the last of these questions directly concerns us here.

 On June 7, 1956, a rock slide destroyed Niagara Mohawk's Schoellkopf Station and its 365,000 kW generating capability. The Adams Plant was not affected, but it generated only 80,000 kW. The loss of this power from the Niagara region was potentially devastating to the industries that had located in the region to take advantage of NFPC's low-cost hydroelectric power. NFPC had generated low-cost power from the river for more than fifty years. The price of this power was, by 1915, regulated by the New York Public Service Commission ("NYPSC"), when NFPC filed its first rate tariff. See Item 43, Exh. 16. NFPC charged high-load users *fn3" in the Niagara Falls area approximately three mills *fn4" per kilowatt hour ("kWh") for this power. See Item 38, P6 (explaining rate calculations). This rate was maintained by NFPC up through the destruction of the Schoellkopf Station. Id., PP7-9. With the loss of this low-cost source of power, industries were suddenly forced to purchase much more expensive power from Canada, and Canadian sources could not guarantee that this power would be available for any length of time. This crisis brought new urgency to congressional deliberations over development of the river. Congress was very concerned that, given the increased cost and uncertain availability of power to meet their needs, industries in the Niagara region might be forced to leave the area, with serious adverse consequences for the region's economy. Accordingly, Congress quickly resolved its differences and enacted the NRA.

 The NRA directed the FPC, since renamed the Federal Energy Regulatory Commission ("FERC"), to issue a license to PASNY to construct and operate a hydroelectric power project on the Niagara River to utilize all of the water allocated to the United States by treaty with Canada. 16 U.S.C. § 836(a). Given the additional water allocation, the new project was capable of producing 1,800,000 kW of firm power, nearly four times the power output of Niagara Mohawk's obsolete power stations. Congress directed the FPC to include in the license, in addition to those conditions deemed necessary by it under the Federal Power Act, 16 U.S.C. § 791a et seq., seven additional conditions governing the distribution and sale of the new project's power. The first condition granted "public bodies and nonprofit cooperatives within economic transmission distance" preference to acquire fifty percent of the project's power. 16 U.S.C. § 836(b)(1). This power was to "be made available at the lowest rates reasonably possible and in such manner as to encourage the widest possible use . . . ." Id. Preference power not purchased by public power companies could be sold to private utilities, as long as "flexible arrangements" were made "to meet the reasonably foreseeable needs of the preference customers." Id. See Power Auth. of the State of New York v. Federal Energy Regulatory Comm'n, 743 F.2d 93, 103-07 (2d Cir. 1984) ("PASNY v. FERC") (interpreting preference clause of NRA). The second condition directed PASNY to make available to preference customers in neighboring states up to twenty percent of the fifty percent available to preference customers in New York. 16 U.S.C. § 836(b)(2).

 The third condition is at the center of this case. It provided that PASNY "shall contract, with the approval of the Governor of the State of New York, pursuant to the procedure established by New York law" to sell to Niagara Mohawk, "for a period ending not later than the final maturity date of the bonds initially issued to finance" the Niagara project, 445,000 kW of project power

 for resale generally to the industries which purchased power produced by project 16 prior to such date, or their successors, in order as nearly as possible to restore low power costs to such industries and for the same general purposes for which power from project 16 was utilized . . . .

 16 U.S.C. § 836(b)(3) (emphasis added). The requirement that PASNY contract to sell this power to Niagara Mohawk hinged on a proviso that Niagara Mohawk agree to surrender its FPC license for Project 16 and waive any claims for damages. Id. This block of power was designed to "replace" power lost to local industry as a result of the rock slide, and thus came to be called "Replacement Power." Prior to the rock slide, approximately 273,000 kW of the 445,000 kW generated by Niagara Mohawk's Project 16 went to Niagara Falls industries at the three mill rate. The balance of Project 16 power was sold to other customers in the region at a higher rate. See Item 47 at 4-6.

 Of the remaining four conditions set forth in the NRA, only the fifth condition has any relevance to this case. *fn5" It provided:

 In the event project power is sold to any purchaser for resale, contracts for such sale shall include adequate provisions for establishing resale rates, to be approved by the licensee [PASNY], consistent with paragraphs (1) and (3) of this subsection.

 16 U.S.C. § 836(b)(5).

 During the seven-year debate in Congress leading to passage of the NRA, numerous hearings were held, see, e.g. Item 42, Exhs. 6-11 (excerpts of hearing transcripts), and more than twenty bills were introduced. Several early bills called for private development. Other bills called for federal development. By the time of the rock slide, however, the overwhelming sentiment in Congress was to designate PASNY to develop the project. Plaintiffs argue that the main reason Congress chose PASNY over a private developer was that PASNY, as a nonprofit governmental agency, could produce the power more cheaply. PASNY could do this for three reasons: (1) it was exempt from state and federal taxes; (2) it could finance new construction less expensively through the sale of tax exempt bonds; and (3) as a nonprofit agency, it would not need to offer shareholders a rate of return on their investment. See Item 38, PP23, 28. This appears to have been one of the reasons Congress selected PASNY to develop the Niagara River. See House Report, supra, at 7 ("The power can be produced by the power authority at a cost below that of other available sources of power."). There is no evidence, however, that it was the only reason.

 In fact, the idea behind § 836(b)(3) did not originate in Congress. This provision stemmed from an accommodation between Niagara Mohawk and PASNY reached after the June 7, 1956, rock slide in which Niagara Mohawk not only abandoned its efforts to obtain congressional authorization to develop the full United States allocation of water, but stated its willingness to relinquish its own licensed allocation of water, and to waive all claims for compensation and/or damages associated therewith. In return, PASNY agreed to sell to Niagara Mohawk the same amount of power previously produced by the Adams Plant and the Schoellkopf Station--445,000 kW--for a period ending on the final maturity date of the bonds sold by PASNY to finance the new project. This accommodation would extend Niagara Mohawk's access to the 445,000 kW perhaps by thirty years or more, as its FPC license was due to expire in 1971 while PASNY's bonds were not likely to mature until after the year 2000. *fn6" This agreement was memorialized in a September 19, 1956, amendment to the application PASNY had pending before the FPC for a license to construct a power project on the Niagara River. See Item 43, Exh. 33. *fn7" Shortly thereafter, this compromise was incorporated into House and Senate bills which, with minimal additional wrangling, became the NRA. See House Report, supra, at 6 (discussing compromise).

 Once the NRA was passed, on January 30, 1958, the FPC issued a license to PASNY. 19 F.P.C. 186. This license incorporated verbatim the entire text of the NRA. Id. at 193-95. The license was dated September 1, 1957, and made effective for fifty years. PASNY completed construction on and began operation of the Niagara project in 1961.

 After completing the hydroelectric project, in February, 1961, PASNY entered into a contract--Contract NS-1--to sell 1,190,000 kW of power to Niagara Mohawk for resale to its customers. Of this allocation, 445,000 kW was designated as Replacement Power to be sold in accordance with the NRA to industrial customers within thirty miles of PASNY's Niagara switchyard. Stem 44, Exh. 61, Part Two, Art. VI [hereinafter Contract NS-1]. PASNY specifically reserved the right within this contract to modify rates charged to Niagara Mohawk for Replacement Power.

 The rate schedules specified in this contract shall be subject to successive modification by the Authority through the ...

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