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KAMINE/BESICORP ALLEGANY L.P. v. ROCHESTER GAS & E

March 18, 1995

KAMINE/BESICORP ALLEGANY L.P., Plaintiff,
v.
ROCHESTER GAS & ELECTRIC CORP., Defendant.



The opinion of the court was delivered by: LARIMER

 The dispute in this case centers on a 1990 contract that was -- to a great degree -- forced upon defendant, Rochester Gas and Electric Corporation ("RG&E"), a very unwilling and reluctant suitor. The contract was compelled by both federal and state law concerning the production of alternative energy sources.

 As Shakespeare said of forced marriages, however, this forced contractual union has so far produced little but "discord and continual strife." *fn1" This lawsuit is but one more episode in this stormy relationship. It most likely will not be the last. But, as will be discussed, infra, regardless of how the "marriage" came about, it is not easily forsaken.

 Plaintiff, Kamine/Besicorp Allegany L.P. ("Kamine"), commenced this action for damages and injunctive relief against defendant RG&E. Kamine asserts causes of action under Section 2 of the Sherman Act, 15 U.S.C. § 2, and Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26.

 Kamine is a limited partnership which is engaged in the private production of wholesale electric power. Kamine has developed and owns a cogeneration plant ("the plant") in Hume, New York. A cogeneration plant is a facility which produces both electric energy and steam or other forms of energy (such as heat) which are used for industrial, commercial, heating, or cooling purposes. 16 U.S.C. § 796.

 RG&E is a public utility corporation that is engaged in the production, transmission, and distribution of electric power. RG&E provides electricity to retail customers in an exclusive, state-franchised area covering nine counties surrounding Rochester, New York.

 In 1990, in conformity with the federal Public Utility Regulatory Policies Act, Kamine and RG&E entered into a detailed Power Purchase Agreement ("PPA") which obligated RG&E to purchase electric power from Kamine for twenty-five years. This Agreement was approved by the New York State Public Service Commission ("PSC").

 In this action, Kamine alleges that RG&E has unlawfully refused to accept power from Kamine under the terms of the agreement, and that RG&E has thereby engaged in anticompetitive conduct aimed at preventing Kamine from entering and competing in the electric-power market.

 Plaintiff has moved for a temporary restraining order ("TRO") and a preliminary injunction enjoining RG&E "from engaging in anticompetitive conduct." Plaintiff's Motion (Item 6). Specifically, Kamine asks the court to order RG&E to comply with the terms of the PPA.

 The court heard oral argument on the TRO application on March 10, 1995. After reviewing the record and considering the parties' arguments, I conclude that the motion should be granted. Kamine has shown that it is threatened with imminent, irreparable harm if the Court does not issue a TRO. In addition, the balance of the hardships on this application tips decidedly in Kamine's favor, and the issues raised in the complaint establish a number of serious questions which present a fair ground for litigation.

 Before discussing Kamine's application in detail, however, the Court notes that the following decision is not meant to minimize the significant issues surrounding the contract dispute (which, as explained infra, is currently being litigated in state court). As will shortly be explained at greater length, RG&E contends that the contract has been breached in several respects and that to enforce the contract as it is currently written will cost RG&E (and ultimately its customers) millions of dollars, because the prices set in the contract are far higher than the prices that RG&E would pay if it were allowed to purchase the same amount of power from other suppliers on the open market. Even Kamine acknowledges that the current market price of power for utilities such as RG&E is drastically lower than anyone anticipated during the time when this contract was formulated.

 Some modifications over time were expected, but it appears doubtful that the parties ever anticipated changes of this magnitude. Whether these drastic, changed circumstances compel some rescission or reformation of the contract is a matter not before this Court at this time. What is before this Court now is RG&E's apparent attempt to unilaterally walk away from this contract without prior approval of the PSC or a court. *fn2"

 BACKGROUND

 I. Statutory Framework

 An understanding of the facts of this case requires some explanation of the statutes and regulations that control the relationship between a private producer such as Kamine and a public utility corporation such as RG&E.

 In 1978, in response to a nationwide energy crisis, Congress enacted the Public Utility Regulatory Policies Act ("PURPA"), 16 U.S.C. § 823a et seq., as an amendment to the Federal Power Act, 16 U.S.C. § 791a et seq.. One of the aims of PURPA was to encourage the development of alternative and more efficient energy sources. In furtherance of that objective, PURPA directs the Federal Energy Regulatory Commission ("FERC") to promulgate rules and regulations requiring public utilities (such as RG&E) to buy electric energy from, and to sell electric energy to, qualifying cogeneration facilities. 16 U.S.C. § 824a-3. A qualifying facility ("QF") is one which meets certain standards set by FERC regarding matters such as size, fuel use, and efficiency. 16 U.S.C. § 796(18)(B). Congress also directed state regulatory authorities to implement FERC's rules and regulations. Id.

 It is clear that Congress was also concerned about limiting the cost of electricity to consumers. Therefore, PURPA provides that no rule requiring a utility to purchase energy from a QF "shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." 16 U.S.C. § 824-a3(b). "Incremental cost of alternative electric energy," which is commonly referred to as the utility's "avoided cost" is defined as "the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source." 16 U.S.C. § 824-a3(d); 18 C.F.R. § 292.201(a)(6).

 FERC regulations provide guidelines for establishing rates and for determining avoided costs. 18 C.F.R. § 292.304. As stated, these regulations are to be implemented by the states through their appropriate regulatory authorities, which in New York is the PSC.

 Pursuant to PURPA, New York enacted Public Service Law § 66-c, which directs the PSC to require any electric corporation to enter into long-term contracts to purchase electricity from a cogeneration facility under such rates, terms and conditions as the PSC finds to be just and economically reasonable. Pub. Serv. L. § 66-c(1). In 1990, at the time that Kamine and RG&E entered into the PPA, the statute also set a minimum sales price for purchased electricity of six cents per kilowatt hour ("KWH"). Pub. Serv. L. § 66-c(2).

 II. Factual and Procedural Background

 Kamine first approached RG&E in 1988 with a proposal for an agreement for the sale of power from a plant which Kamine proposed to build in RG&E's territory. *fn3" Under PURPA, RG&E was required to negotiate with Kamine to purchase Kamine's power. 18 C.F.R. § 292.303(a). When initial negotiations proved fruitless, Kamine petitioned the PSC to order RG&E to negotiate. The PSC did so, and appointed an administrative law judge to supervise the negotiations.

 A number of issues were disputed during the negotiations. These will be addressed as necessary below. At this point, it suffices to say that the parties did enter into an agreement in July 1990, and that the PSC approved the PPA in October 1990.

 Because of Kamine's financing needs for the project, the payment structure governing RG&E's purchases was "front-loaded," meaning that during the early part of the contract term, RG&E would pay specific amounts representing a relatively greater percentage of the total purchase price, to be offset later in the term. Kamine would use these earlier payments to repay its lender.

 Payment amounts are determined by reference to the PPA's division of the contract term into three periods. The length of these periods depends in part on the balance in an "adjustment account." The adjustment account is simply a tally of the total difference between RG&E's actual payments to date and what the total would have been had RG&E purchased the same power at its avoided cost. In other words, the adjustment account measures the difference between what RG&E paid under the PPA and what it would have paid had it not entered into the PPA. If the rates charged under the PPA exceed RG&E's avoided cost, the adjustment account will show a positive balance. A positive balance reflects an "overpayment" for this energy by RG&E.

 The PPA provides that the first period of the term will commence on the date that the plant commences commercial operation until the balance in the adjustment account reaches zero. PPA Art. V(a). "Commercial operation" begins when Kamine has successfully completed certain tests of the plant, synchronized the plant with RG&E's electrical system, and first delivered electricity to RG&E for purposes other than start-up or testing. PPA Art. II.

 The second period begins when the adjustment account reaches zero and lasts until the end of the fifteenth year of commercial operation. The third period then begins and lasts until the end of the twenty-five-year contract term. PPA Art. V(a).

 Nothing guarantees that the adjustment account will ever reach zero, however. Depending on the differences between the PPA rates and the avoided cost, the adjustment account could reflect a negative or positive balance throughout the term. In that event, the first period would last until the end of the entire twenty-five year term. Also, if the account balance reaches zero for the first time after the fifteenth year of the contract, the second period would never occur; the first period would give way to the "third" period.

 As stated, determination of the adjustment account balance requires reference to RG&E's avoided cost. For the first period, the PPA sets out in advance what the avoided cost will be for the years 1990 through 2008. PPA Art. V(a) and Ex. D. Those costs were based on estimates of long-range avoided costs ("LRACs") that had been approved by the PSC in 1988. These LRACs were simply the PSC's predictions of future avoided costs through the year 2008. The LRACs went up every year, from 3.7 cents per KWH in 1990 to 13.4 cents in 2008. At the time the PPA was approved in 1990, all of the parties anticipated that the LRACs were reasonably accurate predictions of future avoided costs. But, in any event, because the PSC had sanctioned these predictions, the parties had little choice but to use the 1988 LRACs when negotiating this type of contract which involved predicting future costs.

 During the second and third periods, the avoided cost was deemed to be the cost set forth in a document known as Service Classification Number 5 ("SC5"). PPA Art. V(a). This is a tariff filed by RG&E and approved by the PSC that is applicable to payments made by RG&E for electricity from suppliers under the terms of the tariff. Unlike an estimate of future avoided costs, then, the SC5 rate would reflect RG&E's actual avoided cost.

 If there was a positive balance in the adjustment account at the start of the fifteenth year, that balance would be used to offset RG&E's payments. If there was a negative balance, RG&E would add to its payments. In no event, however, could the payments be less than 80%, or more than 120%, of the avoided cost.

 At the end of the third period i.e., at the end of the PPA term, any remaining balance in the adjustment account would be paid in a lump sum by the appropriate party. If the balance were negative, RG&E would pay Kamine; if the balance were positive, Kamine would pay RG&E.

 Under these terms, then, any given payment by RG&E might exceed its actual avoided cost at that time, particularly during the early part of the term. The parties obviously anticipated that there might be fluctuations in RG&E's actual costs and in the contract payment requirements, but the contract was structured to rectify those deviations over time. In the long run RG&E would recoup those overpayments, both through offsets in the third period and if necessary, through the final lump-sum payment by Kamine.

 During the negotiations over the PPA, RG&E was concerned about security for any positive balances that might accrue in the adjustment account. RG&E was particularly apprehensive about the possibility that the positive balance might come to exceed the value of the entire plant. In spite of RG&E's request, the PSC did not require that Kamine post successive bonds for any overpayments during the contract term. There is a security requirement concerning obtaining a letter of credit but that requirement does not become operable until the thirteenth year of operation under the PPA. At the start of the thirteenth year of the PPA, Kamine is to obtain and deliver to RG&E a letter of credit securing its obligation to pay any positive balance which is projected to exist at the end of the PPA term. If the letter of credit expires before the end of the PPA term, Kamine must obtain a replacement for it, and continue to do so throughout the duration of the PPA. The amount of each letter of credit is to be the positive balance projected to remain in the adjustment account at the end of the PPA. If the parties cannot agree on that amount, the matter will be submitted to arbitration. PPA Ex. B, § B(6).

 This thirteen-year delay in obtaining a letter of credit is at the heart of the dispute between the parties. RG&E contends, quite simply, that the present payment schedule exceeds RG&E's actual costs to such an extent that the positive adjustment balance at the end of the thirteenth year of the contract will be so large -- RG&E estimates it to be over four hundred million dollars -- that Kamine will be unable or unwilling to obtain a letter of credit and will simply default on its obligations, leaving RG&E, and its ratepayers, with no means to collect the sizeable overpayments.

 At least four years after the parties had entered into the PPA, but before Kamine was ready to begin commercial operation, various matters arose which perturbed RG&E, and which eventually led to its attempt to terminate the PPA. For one thing, actual energy costs were proving to be much lower than the 1988 LRACs which formed the basis of RG&E's avoided costs during part of the contract term. The 1988 LRACs eventually came to exceed actual avoided costs to such an extent that in 1991, the PSC withdrew them on the ground that they had been "overstated." In 1992 the PSC issued new LRACs, which were much lower than the ones utilized in the PPA. That same year, the state Legislature repealed the six-cent minimum for contracts entered into after June 26, 1992 (1992 N.Y. Laws ch. 519); contracts that had already been executed were unaffected by the repeal.

 Another problem concerned the capacity of the plant. In January 1994, RG&E management discovered electrical diagrams that Kamine had submitted to RG&E field personnel in July and December 1993. These diagrams allegedly indicated that the plant would have a capacity of roughly 66 megawatts ("MW") to 79 MW, not the 55 MW specified in the PPA. ...


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