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NEW YORK STATE ELEC. & GAS v. SARANAC POWER

September 29, 2000

NEW YORK STATE ELECTRIC & GAS CORPORATION, PLAINTIFF,
V.
SARANAC POWER PARTNERS, L.P.; LOCKPORT ENERGY ASSOCIATES, L.P.; THE FEDERAL ENERGY REGULATORY COMMISSION; THE PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK AND THE CHAIRMAN, THE DEPUTY CHAIRMAN AND THE INDIVIDUAL COMMISSIONERS OF THE PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, DEFENDANTS.



The opinion of the court was delivered by: Mordue, District Judge.

      MEMORANDUM-DECISION AND ORDER

I. Introduction

In 1978, Congress passed the Public Utilities Regulatory Policies Act ("PURPA"), 16 U.S.C. § 824a-3, as part of a package of legislation*fn1 entitled the "National Energy Act." PURPA was designed to promote long-term economic growth by reducing the nation's reliance on oil and gas, encourage the development of alternative energy sources and thereby combat a nationwide energy crisis. Section 210(a) of PURPA required the Federal Power Commission ("FPC"), now known as the Federal Energy Regulatory Commission ("FERC"), to "prescribe, and from time to time thereafter revise" rules requiring electric utilities to offer both to sell and purchase electric energy from qualifying cogeneration facilities ("QFs").*fn2 16 U.S.C. § 824a-3(a). Section 210(b) of PURPA required that the rates utilities paid for power purchased from QFs be "just and reasonable to the electric consumers" and "not discriminate" against QFs. 16 U.S.C. § 824a-3(b). Finally, in Section 210(e), PURPA exempted QFs from federal and state regulatory control in connection with rates and financial organization. See 16 U.S.C. § 824a-3(e).*fn3

Congress also directed that each state regulatory authority implement the rules prescribed by FERC concerning electric utilities' obligation to purchase power from QFs. See 16 U.S.C. § 824a-3(f).*fn4 Pursuant to PURPA, the New York State legislature enacted New York Public Service Law § 66-c, which provided that the defendant New York Public Service Commission ("PSC") shall require state regulated electrical utilities to enter into long-term contracts for the purchase of electricity from alternative energy sources, including cogeneration facilities. See N.Y.PUB.SERV. LAW § 66-c. Furthermore, Section 66-c granted PSC authority to oversee the contracting process and set the purchase rate for long-term power contracts. See id.

Section 210(b) of PURPA declares that "[n]o such rule [promulgated by FERC] . . . shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy." 16 U.S.C. § 824a-3(b). The "incremental cost" to the electric utility of alternative electric energy 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. § 824a-3(d). The incremental cost described by Congress in PURPA is defined in the accompanying regulations as "avoided costs," or those costs which the utility "avoided" incurring itself by purchasing power from a QF. See 18 C.F.R. § 292.101(b)(6).

Plaintiff, New York State Energy & Gas Corporation ("NYSEG"), a traditional electrical utility, brings the present action principally to obtain relief from long-term contracts with two QFs, defendants Saranac Power Partners, L.P. ("Saranac")*fn5, and Lockport Energy Associates, L.P. ("Lockport").*fn6 In each case, NYSEG's contract requires it to pay for energy purchased from these two companies at a fixed rate equal to its estimated long-run avoided costs ("LRACs") as calculated — or miscalculated — in 1988 by NYSEG and other public utilities in conjunction with PSC. Unfortunately for NYSEG, its LRACs as estimated at the time it entered into required contracts with Saranac and Lockport are considerably higher than its current LRAC projections. According to two independent analysts retained by NYSEG, payments under both the Saranac and Lockport agreements will significantly exceed NYSEG's avoided costs over the terms of the agreements.*fn7 Based on these predictions, NYSEG asserts that the fixed rates of its power purchase agreements ("PPAs") with Saranac and Lockport are unauthorized under PURPA which limits rates for QF purchases to a utility's "incremental" or avoided costs. 16 U.S.C. § 824a-3(b).

II. Procedural and Regulatory History

A. FERC's Rulemaking

PURPA required FERC to prescribe regulations to implement the statute "[n]ot later than 1 year after November 9, 1978." 16 U.S.C. § 824a-3(a). Following public rulemaking proceedings, FERC promulgated regulations governing transactions between utilities and QFs in connection with purchase and sales of electricity. See Small Power Prod. and Cogeneration Facilities; Regs. Implementing Section 210 of [PURPA], Order No. 69, 45 Fed.Reg. 12214 (Feb. 25, 1980). In American Elec. Power Serv. Corp. v. FERC, 675 F.2d 1226 (D.C.Cir. 1982) ("AEP"), four utilities challenged the legality of the very regulations at issue in this case. There, the court held that FERC failed to adequately explain or justify its adoption of the full avoided cost standard in light of the enabling statute, PURPA, which mandated that rates charged to consumers be reasonable and that rates paid to QFs not exceed utilities' incremental costs. See AEP, 675 F.2d at 1232. The plaintiff utilities in AEP argued that the "just and reasonable" language regarding purchase rates in Section 210(b) of PURPA required that rates be set at the lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest. Although FERC could have enacted rules which required states to set PPA rates at less than avoided costs, FERC adopted "as a uniform rule, the maximum purchase rate specified in the statute," after concluding that the full avoided cost standard "would be just and reasonable in every case" as necessary to encourage cogeneration. Id. at 1233. The court found that FERC failed to adequately balance the interests of cogenerators, the public and consumers of electric utilities in rejecting, in an "across-the-board manner," PPA rates below full avoided costs. Id. at 1236.

In American Paper Inst., Inc. v. American Elec. Power Serv. Corp., 461 U.S. 402, 103 S.Ct. 1921, 76 L.Ed.2d 22 (1983) ("API"), the Supreme Court reversed, in part, the D.C. Circuit's determination that FERC had improperly promulgated its avoided cost rules. There, the Court found that FERC had fulfilled its obligation under PURPA to set a rate which was "in the public interest," because "the words `public interest' in a regulatory statute . . . take meaning from the purposes of the regulatory legislation." 461 U.S. at 417, 103 S.Ct. 1921 (quoting Nat'l Assoc. for the Advancement of Colored People v. FPC, 425 U.S. 662, 669, 96 S.Ct. 1806, 48 L.Ed.2d 284 (1976) ("NAACP v. FPC")). The Court found that the primary purpose of PURPA was to encourage cogeneration and that the "just and reasonable to . . . consumers" language of PURPA required FERC only to "consider[] . . . potential rate savings for electric utility consumers." Id. at 415, n. 9, 96 S.Ct. 1806. In the Court's estimation, FERC did consider the possibility of such rate savings, but rejected a percentage-of-avoided-costs approach after determining that purchase rates set at below avoided costs might discourage QF production. See id. at 415, 96 S.Ct. 1806 (citing Small Power Prod. and Cogeneration Facilities; Regs. Implementing Section 210 of [PURPA], Order No. 69, 45 Fed.Reg. at 12222-12223).

B. PSC Proceedings

PSC then ordered NYSEG to enter into a fifteen-year contract with Lockport's predecessor in interest, Empire Energy Niagara Limited Partnership ("Empire"). See Order Granting Petition Subject to Conditions, PSC Case No. 88-E-216 (Nov. 3, 1989).*fn8 Although NYSEG objected to the proposed contract because its 1988 LRAC estimates appeared to be too high and PSC rejected its request for a tracking mechanism or "true up" provision that would reconcile estimated avoided costs with actual avoided costs, NYSEG did not appeal PSC's order approving the contract.

On March 5, 1991, PSC approved three contracts between Falcon Seaboard Oil Company ("Falcon"), Saranac's predecessor in interest, and NYSEG. See Order Approving Contracts Subject to Conditions, PSC Case Nos. 90-E-0867, 90-E-0865 and 90-E-0860 (Mar. 5, 1991).*fn9 Again, NYSEG's request for a reconciliation mechanism was rejected by PSC.*fn10 NYSEG concedes that it did not appeal from either of these orders.

In 1992, PSC reduced NYSEG's estimated LRACs by approximately forty percent. However, NYSEG did not benefit from this revision with respect to its existing contracts, and calculates that the rates it pays under the contracts with Saranac and Lockport are more than triple its actual avoided costs.

C. FERC Proceedings

On February 14, 1995, NYSEG filed a petition with FERC for a declaratory order and request for modification of rates in the Saranac and Lockport PPAs.*fn11 In its petition, NYSEG complained that PSC forced NYSEG to enter into the agreements with Lockport and Saranac despite NYSEG's objections that the PPAs did not adequately protect NYSEG's ratepayers against the risk of payments in excess of avoided costs. NYSEG sought three forms of relief from FERC. First, NYSEG demanded that FERC issue a declaratory order finding that PURPA and its accompanying regulations*fn12 prohibit purchase rates in NYSEG's congressionally mandated PPAs that are in excess of its avoided costs even if such rates were not so excessive at the time the contracts were signed. NYSEG argued that although it voiced its concern that estimated LRACs would prove to be inflated over the course of the long-term agreements with Saranac and Lockport, the aggregate amount of overpayments to these QFs became evident only after NYSEG's time to appeal the orders of PSC directing the utility to enter into those agreements had elapsed. NYSEG also requested that FERC either take appropriate action itself under section 210(b) of PURPA to reform the Saranac and Lockport PPAs or, under section 210(h)*fn13, direct PSC to relieve NYSEG of its obligation to make payments in excess of avoided costs under these contracts. Finally, NYSEG asked FERC to waive or revise its rules as necessary to grant the requested relief. In support of its petition, NYSEG relied on FERC's then recent decision in Connecticut Light & Power Co., 70 F.E.R.C. ¶ 61,012, 1995 WL 9931 (1995) ("CL & P").*fn14

FERC denied NYSEG's petition in its entirety finding in the first instance that the regulations it enacted pursuant to PURPA do not prohibit rates for PPAs which are based on avoided cost estimates at the time a contract is signed even if they exceed a utility's avoided costs at the time of delivery. See NYSEG, 70 F.E.R.C., at 61,116. To wit, FERC cited 18 C.F.R. § 292.304(b)(5) which states:

In the case in which rates for purchases are based upon estimates of avoided costs over the specific term of the contract or other legally enforceable obligation, the rates for such purchases do not violate this subpart if the rates for such purchases differ from avoided costs at the time of delivery.

Id.*fn15 FERC recognized when the above regulation was enacted that avoided costs could change over time and attempted to reconcile the requirement that utilities pay no more than their avoided costs for purchases with the need for QFs to enter contractual commitments based "by necessity, on estimates of future avoided costs." Id.*fn16 Indeed, FERC anticipated that if the avoided cost of power was less when delivered than the price in the PPA, the utility would be subsidizing the QF "at the expense of the utility's other ratepayers." Id. However, FERC was also:

cognizant that in other cases, the required rate will turn out to be lower than the avoided costs at the time of purchase. The Commission [FERC] does not believe that the reference in [PURPA] to incremental cost of alternative energy was intended to require a minute-by-minute evaluation of costs which would be checked against rates established in long term contracts between [QFs] and electric utilities.
Many commentators have stressed the need for certainty with regard to return on investment in new technologies. The Commission agrees with these latter arguments, and believes that, in the long run, "overestimations" and "underestimations" will balance out. . . . The import of [18 C.F.R. § 292.304(b)(5)] is to ensure that a [QF] which has obtained the certainty of an arrangement is not deprived of the benefits of its commitment as a result of changed circumstances. This provision can also work to preserve the bargain entered into by the electric utility.

Id.

Based on this regulatory history, FERC declined to issue the declaratory ruling requested by NYSEG stating it was "far too late" for "NYSEG to argue, for the first time, that these particular regulations have legal and policy flaws requiring that we abrogate contracts entered into under these regulations." NYSEG, 70 F.E.R.C., at 61,116. Moreover, FERC refused to "second-guess" PSC's determination of LRACs, finding that PSC's implementation of its rules and regulations was proper and consistent with PURPA. Id.*fn17 FERC noted that when PSC mandated the Saranac and Lockport contracts, it "specifically addressed and accounted for" the very risk of harm about which NYSEG complained in its petition. NYSEG, 70 F.E.R.C., at 61,116. Instead of requiring protective mechanisms such as avoided cost tracking and reconciliation provisions as it had in other PPAs, FERC noted PSC chose to account for any potential risk of fluctuations in LRACs by applying a discount to the LRAC estimates used to formulate the Saranac and Lockport agreements. See id. at n. 42.*fn18 FERC stated that NYSEG's case was distinguishable from CL & P, where PPA rates which "may have exceeded avoided costs at the time the rates were imposed," were violative of Section 210(b) of PURPA. Id. (emphasis in original). Because the Saranac and Lockport contracts "reflect[ed] State implementation consistent with PURPA and [FERC's] regulations," FERC declined to disturb them. Id.

FERC stated that a "second, independent basis for denying NYSEG's Petition is the Commission's policy against invalidating contracts for which a PURPA-based challenge was not raised timely and is still not pending." Id. FERC noted that NYSEG, "believing it had `neither a cognizable injury nor a basis to complain further to [PSC] or [FERC],' chose not to appeal [PSC's] orders mandating the agreements." Id. (quoting NYSEG's petition at pp. 3-5, 17, 47). According to FERC, this was unlike the facts in CL & P where the utility had been continuously challenging the subject PPA rate — which might have exceeded avoided costs depending upon application of an alleged unlawful state statute — since the state regulatory authority mandated the contract. Id. (citing CL & P, 70 F.E.R.C., at 61,029, 1995 WL 15832). "We believe that the appropriate time in which to challenge a state-imposed rate for a QF purchase is up to the time the purchase contract is signed, not years into a contract." Id. (quoting In re Southern California Edison Co., 70 F.E.R.C. ¶ 61,215, at 61,678, 1995 WL 169000 (1995) ("California"); CL & P, 70 F.E.R.C., at 61,029, 1995 WL 15832). FERC concluded by noting:

In this case, Lockport and Saranac (and their investors) invested in these projects in the reasonable belief that, once the deadline for timely challenges had passed, their contracts with NYSEG were lawful and binding under PURPA. . . . [T]he contracts at issue allocated risks to both the purchaser and the sellers. Like NYSEG, Lockport and Saranac bore risks that their agreements would become uneconomic over time. QFs bear development risks not experienced to the same extent by traditional utilities. As a result, they must rely on their [PPAs] to obtain project financing, and we have recognized the importance of contractual reliance for this purpose, if we were to grant the relief requested by NYSEG and allow the reopening of QF contracts that had not been challenged at the time of their execution, financeability of such projects would be severely hampered. Such a result is not, in our opinion, consistent with Congress' directive that we encourage the development of QFs.

NYSEG, 70 F.E.R.C., at 61,118 (citations omitted).

NYSEG petitioned for rehearing,*fn19 on the bases that FERC erred by: 1) relying on PSC's estimates of LRACs; 2) failing to relieve NYSEG from PPA rates which violate Section 210(b) of PURPA; and 3) failing to modify PPA rates which violate PURPA pursuant to Section 206 of the FPA.*fn20 FERC denied NYSEG's request for reconsideration finding that the arguments therein were merely "restatements" of the arguments NYSEG made in its original petition. NYSEG, 72 F.E.R.C., at 61,340. FERC noted:

Nevertheless, we are not unsympathetic to the concern of utilities that find themselves with legally binding QF contracts that contain rates that currently are above avoided cost. As we have previously explained, we believe that the remedy appropriate to this situation is to allow utilities to buy-out or buy-down such contracts, not to invalidate them. If utilities are prudent in buying out or buying down existing [PPAs], whether or not with QFs, we have indicated that we will permit the recovery in wholesale rates of a pro rata share of the buy-out or buy-down costs.

NYSEG, 72 F.E.R.C., at 61,341 (citing West Penn Power Co., 71 F.E.R.C. ¶ 61,153, at 61,497, 1995 WL 265343 (1995)).

D. District of Columbia Circuit Decision

NYSEG then petitioned the United States Court of Appeals, District of Columbia Circuit for review of FERC's denial of its petition.*fn21 In NYSEG v. FERC, 117 F.3d 1473 (D.C.Cir. 1997), the court dismissed NYSEG's appeal for want of jurisdiction. The court held that "[b]ecause the challenged order does nothing more . . . than announce the position that [FERC] might take in an enforcement action*fn22 before a federal district court, we are without jurisdiction to review it." NYSEG v. FERC, 117 F.3d at 1474. To wit, the court noted that its "review of [FERC's] non-binding assessment of . . . PSC's compliance with . . . PURPA would bind the district court in any future enforcement action, thereby usurping that court's role as the court of first instance in all matters concerning implementation of the statute." Id. at 1475. "[I]t is always the district court that first passes upon the merits of whatever position the Commission may take concerning the implementation of . . . PURPA." Id. at 1476 (citing Indus. Cogenerators, 47 F.3d at 1234-35). Because "[t]he failure of a state commission to ensure that a rate does not exceed a utility's avoided cost is a failure to comply with a regulation implementing . . . PURPA," the court reasoned that NYSEG must challenge PSC through an enforcement action in district court. NYSEG v. FERC, 117 F.3d at 1476.

At bottom, each of NYSEG's requests to [FERC] for relief is effectively a challenge to the rates set by . . . PSC. In response to these requests [FERC] did nothing more than state why in its opinion the challenged rates comply with PURPA. Under the enforcement scheme set up by the Congress, NYSEG may now bring an enforcement action under § 210(h)(2)(B) of . . . PURPA, in which case the district court will assess the merits giving [FERC's] opinion such consideration as it may deserve.

Id. at 1477.

E. The Present Complaint and Cross-Claim

On August 7, 1997, NYSEG filed a complaint against FERC, PSC and various officials of the PSC, Saranac, and Lockport.*fn23 In the first count of the complaint, NYSEG alleges that by failing to take any action with respect to its petition 1) for a declaratory order (that the contracts with Saranac and Lockport violate PURPA); and 2) for modification of rates imposed in the PURPA power purchase agreements with Saranac and Lockport, FERC violated PURPA and the Administrative Procedure Act ("APA")*fn24. NYSEG demands that FERC initiate whatever waivers or rulemaking is necessary to relieve NYSEG from the allegedly illegal obligations of these contracts.

NYSEG also alleges that in its order denying NYSEG's petition, FERC declared a new administrative rule which it dubs the "Continuous Challenge Rule."*fn25 To wit, NYSEG alleges FERC's denial of its petition on this basis constitutes improper rulemaking under the APA because FERC gave no prior notice of its intent to require parties to continually challenge regulations in order to preserve a claim for relief in subsequent administrative proceedings and did not conduct formal notice and comment procedures in promulgating this alleged new rule. See Zhang v. Slattery, 55 F.3d 732, 744-45 (2d Cir. 1995) (interim rule promulgated by Attorney General which directly contradicted Board of Immigration Appeals decision denying asylum to Chinese citizens seeking to avoid China's "one couple, one child" policy was never properly promulgated as legislative rule under APA, where rule changed existing policy and was never subject to notice and comment period).

In its second and third claims for relief, NYSEG alleges that PSC's orders which set LRACs and directed NYSEG to enter into the Saranac and Lockport contracts: 1) violated PURPA and its implementing rules; and 2) violated the Supremacy Clause of the United States Constitution. NYSEG's fourth claim is an enforcement action against PSC pursuant to Section 210(h)(2)(B) of PURPA for failure to implement PURPA properly.

NYSEG's fifth, sixth and seventh claims run against the QF's directly and allege illegality of the PPAs, frustration of purpose and mutual mistake under New York contract law. NYSEG requests relief from performance and restitution.

Allied with NYSEG in part, PSC cross-claimed against FERC alleging that FERC violated PURPA when it failed to reform the Saranac and Lockport PPAs. Relying on the FPA from whence PURPA came, PSC alleges that FERC has authority, after giving notice, soliciting comments and conducting public hearings, to modify utility rates in the public interest. PSC also alleges that PURPA itself requires FERC to revisit its regulations from time to time. PSC claims that federal regulations also grant FERC authority to revisit the issue of QF exemption from utility-type rate regulation and limit the exemptions if necessary. According to PSC, FERC can limit or change the exemptions and then modify the contracts prospectively so that going forward, the PPAs no longer violate PURPA's prohibition against purchase rates which exceed avoided costs. Finally, PSC alleges that FERC's failure to take any action with respect to the Saranac and Lockport contracts is a violation of the APA.

F. The Present Motions

All defendants move pursuant to Fed. R.Civ.P. 12 to dismiss NYSEG's claims against them. Saranac, Lockport, and FERC also seek dismissal of PSC's cross-claim. National Power Lenders Forum ("NPLF") and the Electric Power Supply Association ("EPSA") filed amicus briefs in support of the positions taken by Saranac, Lockport, and FERC.*fn26 Also pending before the Court — but stayed at the present time — are motions for summary judgment or partial summary judgment filed by Saranac, PSC and NYSEG.*fn27

III. Discussion

A. Motions to Dismiss Count I (N.Y.SEG's Claims Against FERC)

1. Personal Jurisdiction

FERC argues in the first instance that NYSEG's claims against it should be dismissed for insufficiency of service of process because NYSEG admittedly failed initially to serve a copy of its summons and complaint on the U.S. Attorney's Office in this district and mail copies of the documents to the Attorney General of the United States as required by Fed.R.Civ.P. 4(i) (governing service of process on the United States and federal agencies). On October 14, 1997, NYSEG complied with this procedural requirement by serving both the district office of the U.S. Attorney and the U.S. Attorney General well within the 120-day time limit set forth in Fed. R.Civ.P. 4(m). In its reply memorandum of law, FERC appears to have abandoned this ground for relief and thus, the Court finds it has personal jurisdiction over FERC herein.

2. Subject Matter Jurisdiction

a. Arguments of the Parties

FERC, along with Saranac and Lockport, argue that this Court lacks subject matter jurisdiction over NYSEG's claims against FERC. These defendants argue that PURPA's enforcement scheme does not authorize a direct action against FERC in district court. Rather, they argue, Section 210(h)(2) of PURPA only authorizes FERC or another aggrieved party to bring an action against a state regulatory authority such as PSC or a non-regulated utility in district court. See 16 U.S.C. § 824a-3(h)(2).*fn28

In response to this argument, NYSEG asserts that the APA provides for judicial review by a district court of FERC's decision not to take any action with respect to its petition for relief from and modification of the contracts. FERC, Saranac and Lockport argue that APA review by this Court is not authorized because: 1) APA review of an agency determination is only available if an aggrieved party has no place else to go for relief. See Bowen v. Massachusetts, 487 U.S. at 901, 108 S.Ct. 2722. According to these defendants, NYSEG has an adequate remedy short of APA review because it can sue PSC in an enforcement action under Section 210(h)(2) of PURPA. See New York City Employees' Retirement Sys. ("NYCERS") v. Securities and Exchange Commission ("SEC"), 45 F.3d 7, 14 (2d Cir. 1995) (litigants with remedies against parties other than the administrative agency which rendered an adverse determination are not entitled to APA review of said agency's action); Marlow v. United States Dep't of Educ., 820 F.2d 581, 583 (2d Cir. 1987).*fn29 Moreover, these defendants argue that FERC's decision not to take enforcement action with respect to ...


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