Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
1-9-1995
Freehold v Bd Regulatory Comm
Precedential or Non-Precedential:
Docket 94-5168
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
NO. 94-5168
____________
FREEHOLD COGENERATION ASSOCIATES, L.P.,
Appellant
v.
BOARD OF REGULATORY COMMISSIONERS OF THE STATE OF NEW JERSEY;
JERSEY CENTRAL POWER AND LIGHT COMPANY
____________
Appeal from the United States District Court
for the District of New Jersey
D.C. No. 94-cv-00375
____________
Argued October 28, 1994
Before: STAPLETON, HUTCHINSON, and ROSENN, Circuit Judges
Opinion Filed January 9, 1995
____________
ROBERT F. SHAPIRO, ESQ. (Argued)
LYNN N. HARGIS, ESQ.
DAVID C. DICKEY, ESQ.
Chadbourne & Parke
1101 Vermont Avenue, N.W.
Washington, D.C. 20005
CHARLES J. WALSH, ESQ.
Sills Cummis Zuckerman Radin Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, NJ 07102-5400
Attorneys for Appellant
STEVEN E. GREENBAUM, ESQ. (Argued)
JOHN P. BIEDERMANN, ESQ.
Berlack, Israels & Liberman
120 West 45th Street
New York, New York 10036
Attorneys for Jersey Central Power & Light Co.
THEODORE C. GRANGER, PUBLIC ADVOCATE (Argued)
Department of the Public Advocate of New Jersey
31 Clinton Street
Newark, NJ 07109
DEBORAH T. PORITZ, ATTORNEY GENERAL
ANDREA M. SILKOWITZ, ASSISTANT ATTORNEY GENERAL
HELENE S. WALLENSTEIN, DEPUTY ATTORNEY GENERAL (Argued)
R.J. Hughes Justice Complex
Trenton, NJ 08625
Attorneys for Board of Regulatory Commissioners
SAMUEL SOOPER, ESQ.
Federal Energy Regulatory Commission
Room 3000
825 North Capitol Street, N.E.
Washington, DC 20426
Attorney for Federal Energy Regulatory Commission
____________
OPINION OF THE COURT
ROSENN, Circuit Judge.
This case has its genesis in Congress' creative effort
to promote the use of alternative energy sources by state and
federal utility authorities. To make the nation more energy
independent, Congress sought to encourage small power production
facilities that use renewable fuels, such as solar, wind, biomass
and water, and cogeneration facilities that use traditional fuels
more efficiently by sequentially producing both electricity and
steam or other useful thermal energy. Freehold Cogeneration
Associates, L.P. ("Freehold") is the type of facility that
Congress wished to promote.
On January 19, 1994, Freehold sought a declaratory
judgment in the United States District Court for the District of
New Jersey that the Board of Regulatory Commissioners of the
State of New Jersey (the "BRC") was preempted by the Federal
Public Utilities Regulatory Policies Act ("PURPA") from modifying
the terms of a previously approved power purchase agreement
("PPA") between Freehold and Jersey Central Power and Light
Company ("JCP&L"), a New Jersey public utility. Freehold also
sought an order enjoining the ongoing BRC proceedings. Freehold
moved for summary judgment, and the BRC and JCP&L moved to
dismiss on various grounds. The district court denied Freehold's
motion for summary judgment and granted the defendants' motion to
dismiss, holding that it lacked subject matter jurisdiction to
hear the matter. Freehold filed a timely appeal to this court.1
We reverse.
I.
Under the Federal Power Act, 16 U.S.C. § 791a et seq.,
the Federal Energy Regulatory Commission (the "FERC") had the
exclusive authority to regulate "public utilities" that sell
electric power at wholesale in interstate commerce. Id. at §
824(e). In 1978, Congress modified the Federal Power Act with
the enactment of the Public Utility Regulatory Policies Act, 16
U.S.C. § 823a et seq., as part of a comprehensive legislative
effort to combat a nationwide energy crisis. PURPA is intended
to control power generation costs and ensure long-term economic
growth by reducing the nation's reliance on oil and gas and
increasing the use of more abundant domestically produced fuels.
In enacting PURPA, Congress directed the FERC to promulgate rules
1
. This court has jurisdiction pursuant to 28 U.S.C. § 1291 over
this appeal from the district court's final judgment. The
jurisdiction of the district court is discussed in section II,
infra.
and regulations requiring public utilities to buy electric energy
from, and to sell electric energy to, qualifying cogeneration
facilities ("QFs"). 16 U.S.C. § 824a-3.2 Congress directed
state regulatory authorities, such as the BRC, to implement the
rules and regulations promulgated by the FERC. Id.
In early 1988, pursuant to the then-effective
cogeneration policies and procedures of the New Jersey Board of
Public Utilities (the "BPU"), the predecessor agency to the BRC,
Freehold commenced negotiations with JCP&L concerning a potential
power purchase agreement. During the pendency of these
negotiations, the BPU adopted certain competitive bidding
guidelines which replaced negotiation as the method by which
utilities were to procure long-term power purchase agreements
with cogeneration facilities such as Freehold.
After these competitive bidding guidelines took effect,
Freehold petitioned the BPU to "grandfather" or exempt it from
the newly adopted guidelines. JCP&L opposed the petition. By
Order dated July 31, 1989, the BPU agreed to grandfather
Freehold. Freehold's negotiations with JCP&L were thereby
governed by the pre-existing policies and procedures, which
allowed Freehold and JCP&L to negotiate the terms of a power
2
. A cogeneration facility is one which produces electrical
energy, and steam or forms of useful energy which are used for
industrial commercial, heating, or cooling purposes. 16 U.S.C. §
796(18)(A). In order to qualify as a QF, a facility must meet
the requirements set forth by the FERC, 18 C.F.R. § 292.101, et
seq., and the facility must be owned by an entity not primarily
engaged in the generation or sale of electrical power, 16 U.S.C.
§ 796(18)(B). Freehold is a QF.
purchase agreement. On March 26, 1992, after three years of
extensive negotiations, Freehold and JCP&L entered into a power
purchase agreement (the "PPA"), to commence on the date of BRC
approval and to continue thereafter for a period of twenty years.
The BRC approved the PPA by order dated July 8, 1992.3
Under the terms of the PPA, JCP&L is to pay Freehold
100% of JCP&L's 1989 avoided cost for the purchase of electrical
power. Avoided cost is the cost which JCP&L avoids by purchasing
energy from Freehold rather than generating the energy itself or
purchasing it from some other source. 16 U.S.C. § 824a-3(d).
On April 12, 1993, in response to decreases in the cost
of obtaining electrical power, the BRC directed public utilities
to notify it of any power supply contracts which were no longer
economically beneficial. The BRC wished to encourage buy outs
and other remedial measures to reduce power costs.
After reviewing its contract with Freehold, JCP&L
concluded that the PPA should be modified. On April 16, 1993,
JCP&L contacted Freehold and proposed a buy out of the PPA.
Freehold rejected the proposal. On May 12, 1993, JCP&L notified
the BRC that the PPA was no longer an economically beneficial
3
. JCP&L challenges the BRC's 1988 order grandfathering Freehold
from the 1988 rate guidelines, and the 1992 BRC order approving
the rates. However, both of these orders are now final and
nonappealable.
Additionally, we will not address the Division of the Ratepayer
Advocate's ("DRA") argument that the BRC's approval of a 1989
avoided cost in 1992 was ultra vires because the DRA is making
this argument for the first time on appeal. See Patterson v.
Cuyler, 729 F.2d 925, 929 (3d Cir. 1984).
contract because the contractual avoided cost was significantly
higher than the current avoided cost due to the decrease in the
cost of obtaining electrical power. On September 22, 1993, JCP&L
again proposed a buy out to Freehold, which Freehold again
rejected. The BRC then unsuccessfully attempted to formulate a
joint agreement between the parties modifying the PPA. By order
dated January 5, 1994, the BRC directed the parties to
renegotiate the purchase rate term of the PPA or, in the
alternative, to negotiate an appropriate buy out of the PPA. The
order further provided that if the parties did not reach an
agreement within 30 days of the order, the BRC would commence an
evidentiary hearing to consider various courses of action.
Freehold filed this action on January 14, 1994, seeking
a judgment declaring that the BRC's order is preempted by PURPA
and a court order enjoining the enforcement of that order. The
district court granted the defendants' motion to dismiss, holding
that section 210(g) of PURPA, 18 U.S.C. § 824a-3(g), and the
Johnson Act, 28 U.S.C. § 1342, divested it of subject matter
jurisdiction. The court further found that the PPA, which refers
disputes under the agreement to "the BRC or a court of competent
jurisdiction in the State of New Jersey," supported its finding
that there was no federal jurisdiction. The district court did
not address the preemption argument in its opinion.
II.
In enacting PURPA, Congress sought to overcome
traditional electric utilities' reluctance to purchase power from
nontraditional electric generation facilities and to reduce the
financial burden of state and federal regulation on
nontraditional facilities. FERC v. Mississippi, 456 U.S. 742,
750-51 (1982). To overcome the first impediment to developing
nontraditional sources of power, section 210(a) of PURPA, 16
U.S.C. § 824a-3, requires the FERC to prescribe "such rules as it
determines necessary to encourage cogeneration and small power
production," including rules requiring traditional utilities to
purchase electricity from QFs. FERC v. Mississippi, 456 U.S. at
751. State regulatory authorities will then implement these
rules. 16 U.S.C. § 824a-3(f).
To surmount the second obstacle, section 210(e) of
PURPA requires the FERC to implement regulations exempting QFs
from federal regulation to which traditional electric utilities
are subject, including most provisions of the Federal Power Act
and "[s]tate laws and regulations respecting the rates, or
respecting the financial or organizational regulation, of
electric utilities." 16 U.S.C. § 824a-3(a)(1). In accordance
with these provisions of PURPA, the FERC promulgated regulations
governing transactions between utilities and QFs, including a
specific requirement that a utility must purchase electricity
made available by QFs at a rate up to the utility's full avoided
cost. 18 C.F.R. §§ 292.303-304 (1993).
Acting pursuant to section 210(e)(1) of PURPA, the FERC
also promulgated regulations exempting QFs from various federal
and state regulatory requirements. The regulations state in
pertinent part:
(1) Any [QF] shall be exempted . . . from
State law or regulation respecting:
(i) The rates of electric
utilities; and
(ii) The financial and
organizational regulation of
electric utilities.
18 C.F.R. § 292.602(c).
A.
Freehold asserts that the district court had federal
question jurisdiction over this case pursuant to 28 U.S.C. § 1331
because Freehold claimed that the BRC proceeding violated its
federally-established PURPA rights. As support, Freehold relies
on Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983), in which
the Court stated:
It is beyond dispute that federal courts have
jurisdiction over suits to enjoin state
officials from interfering with federal
rights. . . . A plaintiff who seeks
injunctive relief from state regulation, on
the ground that such regulation is pre-empted
by a federal statute which, by virtue of the
Supremacy Clause of the Constitution, must
prevail, thus presents a federal question
which the federal courts have jurisdiction
under 28 U.S.C. § 1331 to resolve.
Id. at 96 n.14 (citations omitted). Accord Airco Industrial
Gases, Inc. Div. of BOC Group, Inc. v. Teamsters Health & Welfare
Pension Fund, 850 F.2d 1028, 1032-34 (3d Cir. 1988) (district
court subject matter jurisdiction under section 1331 turns on
whether cause of action arises under laws of United States).
The district court did not address section 1331
jurisdiction, but rather read section 210(g) of PURPA as carving
out an exception to federal jurisdiction over all PURPA claims
except those involving judicial review of a final decision by the
FERC. The district court reasoned that:
[B]y enacting [section 210(g)], Congress
specifically provided that judicial review of
orders by the State regulatory authorities
was to be made only by the state courts or
FERC. The only instance where Congress
provided for federal court jurisdiction is
where a party seeks judicial review of a
decision by FERC. Here, FERC has made no
determination which this Court might review,
nor does Freehold allege this as a basis for
jurisdiction. Thus, under PURPA, this Court
does not have jurisdiction over Freehold's
challenge to the BRC's order.
Section 210(g)'s language, however, shows that it is
more limited in scope than the district court believed. Section
210(g) provides:
(1) Judicial review may be obtained
respecting any proceeding conducted by a
State regulatory authority or nonregulated
electric utility for purposes of implementing
any requirement of a rule under subsection
(a) . . . [under the same requirements as
judicial review may be obtained under 16
U.S.C. § 2633] (emphasis added).
Thus, section 210(g)(1) applies only to review of proceedings by
state regulators or nonregulated utilities designed to implement
any requirement of rules promulgated by the FERC pursuant to
section 210(a), 16 U.S.C. § 824a-3(a). Section 210(a) requires
utilities to purchase energy from and sell energy to qualifying
facilities at certain prices.4
4
. Section 210(g)(2) is not applicable to this action. That
section provides:
The parties disagree as to whether Freehold is
challenging the BRC's implementation of the FERC's rules under
section 210(a) or whether it is challenging the BRC's actions
under section 210(e) and supporting regulations. Freehold
argues, and the FERC, as amicus, agrees, that Freehold is not
challenging the validity of state action implementing the rules
adopted by the FERC pursuant to section 210(a). Rather, it
alleges that the BRC proceeding is inconsistent with and
preempted by section 210(e) and the FERC regulations promulgated
thereunder, which exempt QFs from state utility regulation. See
16 U.S.C. § 824a-3(e)(1); 18 C.F.R. § 292.602(c).
The defendants argue that Freehold's complaint was
brought under section 210(a) of PURPA because the complaint
refers to the FERC's rules implemented under subsection (a).
Before the district court, Freehold clearly relied upon FERC's
rules implemented under section 210(a) in arguing that the BRC's
actions were preempted. As noted by Freehold, however, such
(..continued)
Any person (including the Secretary) may
bring an action against any electric utility,
qualifying small power producer, or
qualifying cogenerator to enforce any
requirement established by a State regulatory
authority or nonregulated electric utility
pursuant to subsection (f). [Such action
shall be brought under the same requirements
as judicial review may be obtained under 16
U.S.C. § 2633].
This case does not involve a state regulation promulgated
pursuant to section 210(f), which governs the sale and purchase
of electricity between utilities and QFs, nor was it brought by a
person against a QF to enforce such a regulation.
references were necessary to explain what the FERC's PURPA rules
provided in order to establish that the BRC's actions were
outside those rules. The pleadings reasonably can be read to
assert a claim that the BRC proceeding is inconsistent with and
preempted by section 210(e) of PURPA and the FERC regulations
promulgated thereunder, which exempt QFs from state utility
regulation. See Bristol Energy Corp. v. New Hampshire Pub.
Utils. Comm'n, 13 F.3d 471, 474 (1st Cir. 1994) (even though
defendant sent out data requests pursuant to a certain statute
which precluded federal jurisdiction, the court agreed with
plaintiffs that the case did not "arise under" that statute, but
rather implicated principles of preemption relating to the QF
exemption and the Supremacy Clause, which triggered federal
question jurisdiction).
The BRC actually concedes that Freehold's complaint was
not brought to obtain review of a Board proceeding to implement
the FERC rules as required by the jurisdictional limitation in
section 210(g) of PURPA. Relying on Greensboro Lumber Co. v.
Georgia Power Co., 643 F. Supp. 1345 (N.D. Ga. 1986), aff'd, 844
F.2d 1538 (11th Cir. 1988), however, the BRC argues that
Freehold's complaint contends that the BRC has failed to adhere
to its own implementation plan under the FERC regulations by
attempting to revoke or modify its prior approval of the PPA.
Thus, the BRC submits that "Freehold's complaint [involves] a
claim with regard to the Board's Order implementing the FERC
rules."
The district court also relied on Greensboro. In that
case, the District Court for the Northern District of Georgia
held that section 210(g) divested it of jurisdiction over a QF's
claim that a nonregulated utility failed to adhere to its own
implementation plan in its dealings with the QF. Greensboro, 643
F. Supp. at 1374. The court held that PURPA requires that such
an "as applied" claim "must be bought (sic) in state court, which
has exclusive jurisdiction 'to enforce any requirement' of a
nonregulated utility's implementation plan." Id. (citing 16
U.S.C. § 824a-3(g)(2)). Thus, PURPA divested the court of
jurisdiction because the case involved a claim arising under
section 210(f)(1).
In contrast, this case does not involve a claim arising
under section 210(f), see supra note 4, but rather a claim
arising under section 210(e). Freehold does not allege that an
unregulated authority has failed to provide service to it in
violation of the authority's implementation plan, or otherwise
challenge the BRC's implementation of FERC rules "as applied."
Rather, Freehold complains that the BRC has interfered with its
federally-granted right to be exempt from certain utility-type
state regulation. See Independent Energy Producers Ass'n v.
California Pub. Utils. Comm'n, No. C-91-2644 MHP, 1992 WL 533058
(N.D. Cal. June 3, 1992), rev'd on other grounds, 36 F.3d 848
(9th Cir. 1994).
Because Freehold is essentially claiming that the BRC
is subjecting it to regulations precluded by section 210(e), the
jurisdictional limitations of sections 210(g)(1) regarding state
proceedings implementing any requirement of a rule enacted under
subsection (a) are not relevant to the district court's
jurisdiction. Thus, it was error to dismiss Freehold's complaint
on the basis of PURPA's jurisdictional limitations. The district
court possessed jurisdiction to hear Freehold's preemption claim
pursuant to 28 U.S.C. § 1331.
B.
The district court also found that it must dismiss
Freehold's complaint because the Johnson Act, 28 U.S.C. § 1342,
eliminated jurisdiction. In enacting the Johnson Act, Congress
intended to seriously curtail federal jurisdiction over the
subject of state utility rates. See Zucker v. Bell Telephone
Co., 373 F. Supp. 748, 750 (E.D.Pa. 1974), aff'd, 510 F.2d 971
(3d Cir.), cert. denied, 422 U.S. 1027 (1975). The Johnson Act
provides:
The district courts shall not enjoin, suspend
or restrain the operation of, or compliance
with, any order affecting rates chargeable by
a public utility and made by a State
administrative agency or a rate-making body
of a State political subdivision where:
(1) Jurisdiction is based solely on
diversity of citizenship or repugnance of the
order to the Federal Constitution; and,
(2) The order does not interfere with
interstate commerce; and,
(3) The order has been made after reasonable
notice and hearing; and,
(4) A plain, speedy and efficient remedy may
be had in the courts of such State.
All four of the Act's criteria must be met for it to apply. See
Zucker, 373 F. Supp. at 751.
The district court concluded that all four elements
were present in this case. It held that the first requirement
had been met because Freehold sought declaratory and injunctive
relief on the basis that the BRC's Order was preempted by PURPA.
The court concluded, "[i]t is apparent that Freehold alleges
jurisdiction on the basis that the Order is repugnant to the
Federal Constitution since Freehold claims that the Supremacy
Clause mandates that the Order give way to PURPA."
The Johnson Act, however, requires that jurisdiction be
based solely on the federal constitution. Freehold's claim that
the BRC's order is preempted does not rely solely on
constitutional grounds, but also relies on PURPA, a federal
statute. In a similar case, the Eighth Circuit Court of Appeals
held that the Johnson Act did not preclude federal jurisdiction
over a claim that a public service commission's refusal of relief
was in conflict with and preempted by the Federal Power Act. The
court reasoned:
It is true, of course, that a federal statute
overrides conflicting state law only because
of the Supremacy Clause of the Federal
Constitution. In a sense, therefore, a
preemption claim always asserts repugnance of
state law to the Federal Constitution. But
such a claim does not usually require that
the Constitution itself be interpreted.
Rather, the meaning of federal statutes and
of state law must be explored, and the extent
of any conflict ascertained. A state law
struck down on the basis of preemption is
perhaps more aptly labeled "unstatutory" than
"unconstitutional." In any case, whatever
the theoretical arguments might be, all of
the appellate authority in point of which we
are aware upholds federal jurisdiction in
utility rate cases where a substantial claim
of federal statutory preemption is pleaded.
Arkansas Power & Light Co. v. Missouri Pub. Serv. Comm'n, 829
F.2d 1444, 1449 (8th Cir. 1987) (citations omitted).5
Thus, a statutorily-based preemption claim does not
provide a basis for invoking the Johnson Act to deprive a federal
court of jurisdiction. Because this case does not meet the first
prong of the Johnson Act analysis, it is not necessary for this
court to reach the remaining prongs.
C.
The district court further concluded that it lacked
subject matter jurisdiction because the PPA contains a choice of
forum provision providing that all disputes arising under the PPA
5
. See also Hawaiian Tel. Co. v. Public Utils. Comm'n, 827 F.2d
1264, 1273 (9th Cir. 1987), cert. denied, 487 U.S. 1218 (1988);
New Orleans Pub. Serv., Inc. v. New Orleans, 782 F.2d 1236, 1242-
42 (5th Cir. 1986), withdrawn in part on other grounds, 798 F.2d
858 (5th Cir. 1986), cert. denied, 481 U.S. 1023 (1987); Aluminum
Co. of America v. Utilities Comm'n of North Carolina, 713 F.2d
1024, 1028 (4th Cir. 1983), cert. denied, 465 U.S. 1052 (1984);
International Bhd. of Elec. Workers, Local Union No. 1245 v.
Public Serv. Comm'n, 614 F.2d 206, 210 (9th Cir. 1980); Kentucky
West Virginia Gas Co. v. Pennsylvania Pub. Util. Comm'n, 620 F.
Supp. 1458, 1460-61 (M.D. Pa. 1985), rev'd on other grounds, 791
F.2d 1111 (3d Cir. 1986).
In Kentucky West Virginia, the defendant did not appeal the
district court's decision that the Johnson Act did not deprive it
of jurisdiction, so this court did not discuss the issue. The
cases cited by JCP&L are not to the contrary because none of them
involve preemption claims. Rather, they involve claims under 42
U.S.C. § 1983, the gravamen of which is a violation of federal
constitutional rights. The BRC has not raised the Johnson Act
issue on appeal.
would be resolved either by the BRC or by a New Jersey state
court. The court reasoned:
The parties provided that the PPA "shall be
governed by and construed in accordance with
the laws of the State of New Jersey
applicable to contracts made and to be
performed in that State, irrespective of the
application of any conflicts of laws
provisions." Further, the parties "agree[d]
that all disputes arising under [the PPA] not
resolved between the parties shall be decided
by a petition to the BRC or a court of
competent jurisdiction in the State of New
Jersey and [Freehold] hereby submits itself
to the jurisdiction of the BRC or such court
for such purposes.
PURPA and its regulations do not prevent Freehold from
waiving its statutory rights, see 18 C.F.R. § 292.301(b)(1), and
thus Freehold may legally consent to have PPA disputes heard in
state court. The choice of law and choice of forum provisions
quoted by the district court, however, merely demonstrate that
Freehold agreed to submit disputes arising under the PPA to
either the BRC or a court of competent jurisdiction of the State
of New Jersey, not that it gave up its right to be exempt from
state laws and regulation. Freehold's complaint demonstrates
that this is not an action to resolve a dispute under the PPA,
but rather, a preemption claim against the BRC. Thus, the
district court erred in holding that the PPA supports a finding
that it lacks jurisdiction to hear this matter.6
6
. On appeal, JCP&L also contends that a federal court should
abstain from resolving the merits of this case even if it
possesses subject matter jurisdiction. We disagree.
Abstention under Younger v. Harris, 401 U.S. 37 (1971), Burford
v. Sun Oil Co., 319 U.S. 315 (1943) and Railroad Com. of Texas v.
III.
The defendants argue that if the federal courts have
jurisdiction and abstention is inapplicable, this court should
not address the merits of the preemption question, but should
remand for consideration to the district court. JCP&L also
argues that dismissal is mandated because Freehold's claim is
moot and otherwise not ripe for adjudication. JCP&L and the BRC
additionally assert that there are disputes over material facts
that preclude any grant of summary judgment for Freehold and
there are no "exceptional circumstances" justifying a resolution
by this court of Freehold's motion for summary judgment.
On the other hand, Freehold asserts that its claim is
ripe for adjudication as a matter of law because the BRC has been
subjecting it to extensive state administrative, utility-type
rate hearings and disclosure requirements since March 1994.
Freehold vigorously argues that there are no factual issues to be
(..continued)
Pullman Co., 312 U.S. 496 (1941) is "an extraordinary and narrow
exception to the district court's duty to adjudicate a
controversy properly before it, justified only in the exceptional
circumstances where resort to state proceedings clearly serves an
important countervailing interest." United Services Auto. Asso.
v. Muir, 792 F.2d 356, 360-61 (3d Cir. 1986), cert. denied, 479
U.S. 1031 (1987). The doctrine of discretionary abstention is
predicated upon a federal policy of comity: federal courts of
equity should exercise their discretionary power with proper
consideration for the independence of state government in
carrying out its governmental functions. In this case, however,
our concern is with carrying out a federal statutory scheme
promoting the development of alternative energy sources. The
alleged intrusive action is not by the federal government, but,
on the contrary, by a state regulatory agency. We conclude that
abstention is not appropriate in this case and does not warrant
any extended discussion.
considered in addressing the legal question of preemption, and
that the appellees have had ample opportunity to make every
argument that they could in defense against Freehold's claim that
PURPA preempts the BRC's order. Freehold notes that the only
alleged factual dispute that the BRC and JCP&L have been able to
claim before this court is whether the so-called "regulatory out"
clause permits the BRC to modify Freehold's contractual rates.
Freehold, however, counters that the "regulatory-out" clause
dispute requires no additional factfinding because it involves
only a simple contract construction issue capable of resolution
on the face of the PPA. We agree; the clause is unambiguous and
requires no extrinsic evidence for its construction.
Freehold also contends that there are exceptional
circumstances here that mandate disposition by this court of the
preemption issue without remand to the district court. It claims
that the cogeneration project has already been delayed by the
time-consuming and costly proceedings before the BRC and that
every day adds immeasurably to the project's cost. Freehold
argues that interest rates are rising, equipment and construction
costs are increasing, and the legal costs of this action and the
action before the BRC are escalating, while the revenues from the
project, if constructed, are fixed for the life of the contract
with JCP&L.
A.
In light of the ongoing proceedings before the BRC, we
see no merit whatsoever to the argument that the issue is moot.
As to the question of ripeness, the Supreme Court stated in
Abbott Labs. v. Gardner, 387 U.S. 136 (1967), its leading
discussion on the subject, and again reiterated in Pacific Gas &
Elec. Co. v. State Energy Resources Conservation & Dev. Comm'n,
461 U.S. 190, 201 (1983), that the question of ripeness turns on
"the fitness of the issue for judicial decision" and "the
hardship to the parties of withholding court consideration."
Abbott Labs., 387 U.S. at 149.
In Presbytery of New Jersey of Orthodox Presbyterian
Church v. Florio, No. 93-5559, 1994 WL 638864 (3d Cir. 1994),
this court adopted the three part test from Step-Saver Data
Systems, Inc. v. Wyse Technology, 912 F.2d 643, 647 (3d Cir.
1990), to determine whether we would engage in pre-enforcement
review in the context of a declaratory judgment action: (1) the
adversity of the parties' interests, (2) the conclusiveness of
the judicial judgment, and (3) the utility of that judgment.
Slip. op. at 14.
There can be no question here about the adversity of
the parties' interests. JCP&L seeks to alter or modify the PPA
it entered into with Freehold on March 26, 1992. The BRC, which
had approved that contract consistent with PURPA's implementation
requirements, subsequently directed Freehold and JCP&L to
renegotiate the purchase price terms of the PPA or, in the
alternative, to negotiate a buy out of the PPA. Freehold
rejected a renegotiation of the purchase price terms of the PPA
and a buyout by JCP&L. Since then, the BRC has commenced an
extensive evidentiary proceeding to consider various courses of
action, including the modification or revocation of its approval
of the PPA. In this litigation and on appeal, Freehold's
position is diametrically opposed to that of the defendants.
Thus, there is an actual concrete controversy "of sufficient
immediacy and reality to warrant the issuance of a declaratory
judgment." Salvation Army v. Department of Community Affairs,
919 F.2d 183, 192 (3d Cir. 1990) (quoting Steffel v. Thompson,
415 U.S. 452, 460 (1974)).
Furthermore, a judgment of this court will be
conclusive. It will determine whether the BRC proceedings
conflict with or are expressly preempted as a matter of law by
section 210(e) of PURPA and FERC's implementing rules. Moreover,
we are not persuaded that factual developments at the BRC
proceedings would add anything to the legal construction of
PURPA.
Finally, there remains for consideration the last of
the Step-Saver three part test, the utility of such a judgment.
Freehold convincingly contends that the BRC's proceeding is
impeding Freehold's ability to obtain financing for its facility
and jeopardizes not only the PPA, but also the project's
financial viability.
Freehold also argues that additional delay may make it
impossible to meet the construction and other deadlines contained
in project contracts and permits. This argument is very
persuasive. It takes but little experience in financial markets
to realize that lending institutions will not lend a borrower
large sums of money when the life of the underlying project is
threatened by extensive litigation.7 While the BRC litigation
has been in process and this appeal pending, the Federal Reserve
Bank has increased interest rates six times.8 Additional costs
because of the delay -- not only in interest, but also in
material and labor costs -- are irrecoverable under the terms of
the PPA. Moveover, Freehold cannot recover damages from the BRC
if it prevails on the merits.
In Pacific Gas & Elec. Co., 461 U.S. 190, a question of
preemption arose under circumstances where California's
traditional role of regulating the generation and sale of
electrical production challenged a complex federal scheme to
promote the development of civilian nuclear energy. The
plaintiff utilities filed an action in the federal district court
seeking a declaration that certain California regulations were
invalid under the Supremacy Clause because they were preempted by
the Atomic Energy Act of 1994. Ripeness became an issue in the
federal courts because the state administrative agency had not
yet resolved the proceedings before it. In disposing of the
7
. In the submission to the BRC of the proposed joint
modification agreement dated November 3, 1993, between Freehold
and the Staff of the Board of Regulatory Commissioners, Freehold
represented, and this representation was undisputed, that
expeditious approval of the joint agreement "is necessary so that
Freehold can go forward with the Project Financing. The lending
company will not make commitments until the issue of rate
reduction is resolved."
8
. See 80 Fed. Reserve Bulletin 610 and 913. See also John E.
Woodruff, Fed jolts interest rates up, The Baltimore Sun, Nov.
16, 1994, at 1A (discussing the Federal Reserve's increases in
interest rates during 1994 and their effect on consumers and
businesses).
ripeness issue, the Court examined the Abbott Labs. test of the
"fitness of the issue for judicial decision" and "the hardship to
the parties of withholding court consideration" and concluded
that both factors favored a finding that the issue was ripe for
adjudication. It stated:
The question of pre-emption is predominantly
legal, and although it would be useful to
have the benefit of California's
interpretation of what constitutes a
demonstrated technology or means for the
disposal of high-level nuclear waste,
resolution of the pre-emption issue need not
await that development. Moreover,
postponement of decision would likely work
substantial hardship on the utilities.
Id. at 201. The Court noted that one does not have to await the
ultimate impact of the threatened injury to obtain preventive
relief. The imminence of the injury is sufficient.
In Middle South Energy, Inc. v. Arkansas Pub. Serv.
Comm'n, 772 F.2d 404 (8th Cir. 1985), cert. denied, 474 U.S. 1102
(1986), the complaint also raised a preemption challenge to state
proceedings. As in this case, the plaintiff did not challenge
the state's ultimate substantive decision, but rather its
authority to conduct proceedings to determine whether it should
declare void ab initio certain contracts entered into by a
utility pertaining to the purchase of power from, or payment for
construction of, a nuclear power plant in Mississippi. The court
concluded that it "can hardly be doubted that a controversy
sufficiently concrete for judicial review exists when the
proceeding sought to be enjoined is already in progress." Id. at
410-411.
We also conclude that the issue here is ripe for
adjudication. The proceedings before the BRC have been ongoing
for nearly one year. The interest that Freehold seeks to
vindicate in this proceeding is the right to be free from "state
laws . . . respecting the rates . . . of electric utilities" and
from the expense, delay, and uncertainty inherent in the
administration of such laws. If, as Freehold insists, the
ongoing BRC proceedings constitute state regulation of utility
rates and the burdens on Freehold occasioned by those proceedings
are the kinds of burdens which Congress intended QFs to be
spared, Congress' mandate would be frustrated if Freehold's right
to judicial review were postponed. There is a concrete dispute
that has already worked a severe hardship upon Freehold, and a
determination of the legal issue of preemption need not await any
further developments before the BRC.
B.
The BRC and JCP&L rely on Equibank, N.A. v. Wheeling-
Pittsburgh Steel Corp., 884 F.2d 80, 86 (3d Cir. 1989), for the
proposition that this court generally has declined to address
issues that were not decided by the trial court absent
exceptional circumstances. In Equibank, however, we declined to
address the merits because they had not been fully briefed by the
parties and additional factfinding might have been required by
the district court. In contrast, the original complaint in this
case sought summary judgment on the sole legal question of
whether PURPA preempted the BRC's order which directed a hearing
on Freehold's previously approved rate. The parties have fully
and repeatedly briefed this issue in the district court where
they also engaged in substantial oral argument on the merits.
Moreover, as previously alluded to, the increasing financial
pressure and rising costs imposed on Freehold because of the
protracted delay, the escalating interest rates in the financial
market, and the probability that the entire project will no
longer be viable if we remand, constitute exceptional
circumstances warranting our resolution of the preemption issue.9
IV.
Our task is not to examine the merits underlying the
controversy between JCP&L and Freehold over whether the PPA
negotiated and executed in 1993 may be now revised and altered.
No claim of fraud or mutual mistake of fact is alleged in the
negotiation and execution of the PPA. We must determine only
whether PURPA preempted the BRC order, dated January 5, 1994,
directing the parties to renegotiate the purchase rate terms of
the PPA or, in the alternative, to negotiate an appropriate
9
. Ford Motor Co. v. Summit Motor Prods., Inc., 930 F.2d 277 (3d
Cir.), cert. den. sub nom. Altran Corp. v. Ford Motor Co., 112
S.Ct. 374 (1991), and Virgin Islands Conservation Soc. v. Virgin
Islands Bd. of Land Use Appeals, 881 F.2d 28 (3d Cir. 1989),
cited by JCP&L for the proposition that there are no "exceptional
circumstances" justifying the resolution by this court of
Freehold's motion for summary judgment are inapposite. In both
of these cases, this court only decided that it would not
consider an issue raised for the first time on appeal without
compelling circumstances. In neither of these cases was the
matter of compelling circumstances analyzed or briefed as they
are here.
buyout of the PPA, failing which the BRC would and did commence
proceedings now pending before it. We conclude that it does.10
A state law may not only be preempted expressly by
Congress, but whenever it conflicts with federal law. Fidelity
Federal Sav. and Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153
(1982). Under the Supremacy Clause of the United States
Constitution, a federal agency acting within the scope of its
congressionally delegated authority has the power to preempt
state regulation and render unenforceable state or local laws
which are otherwise not inconsistent with federal law. Louisiana
Public Service Com. v. FCC, 476 U.S. 355, 368-69 (1986). Of
course, the application of the preemption doctrine requires a
determination of congressional intent in enacting a federal law.
That intent is not necessarily dependent on express congressional
authorization to nullify or render partially or wholly
unenforceable an inconsistent state law or regulation. It also
occurs "where Congress has legislated comprehensively, thus
occupying the entire field of regulation and leaving no room for
the States to supplement federal law, or where the state law
stands as an obstacle to the accomplishment and execution of the
full objectives of Congress." Id. at 368-69 (citation omitted).
10
. The district court held that the dispute before the BRC
arises under the PPA and presumed that it was not subject to
preemption. Freehold, however, has no dispute under the PPA; it
filed a complaint in the district court to protect the terms and
integrity of the PPA from unwarranted intrusion by the BRC. The
BRC is attempting to alter the terms of the PPA after having
fully approved it in a final and non-appealable order. We do not
believe that Freehold's claim can correctly be characterized as a
dispute under the PPA.
As we have previously stated in this opinion, Congress
modified the Federal Power Act, which gave the FERC exclusive
authority to regulate public utilities engaged in the sale of
electric power at wholesale in interstate commerce, by enacting
PURPA as part of a comprehensive legislative effort to solve a
nationwide energy crisis and thus reduce the nation's dependence
on fossil fuels. In PURPA, Congress directed the FERC to
promulgate regulations requiring public utilities to buy electric
energy from and to sell electric energy to qualifying
cogeneration facilities. After extensive hearings, Congress
concluded that the energy problem was nationwide in scope and
therefore required "federal standards regarding retail sale of
electricity, as well as federal attempts to encourage
conservation and make efficient use of scarce energy resources."
FERC v. Mississippi, 456 U.S. at 757.
Section 210 of PURPA sets forth the benefit to which
QFs are entitled. It creates a market for their energy by
requiring that the FERC establish regulations that obligate
public utilities to sell electric energy to and purchase electric
energy from QFs. 16 U.S.C. § 824a-3(a). Section 210(b) requires
the FERC to promulgate regulations to ensure that the rates for
these purchases "shall be just and reasonable to the electric
consumers of the electric utility in the public interest." These
rates may not exceed the incremental cost to the utility of
purchasing alternative electric energy. 16 U.S.C. § 824a-3(b).11
11
. Where, as here, the PPA has a long-term, fixed price,
tension may arise between this consumer protective provision of
Pursuant to PURPA's requirements, the FERC issued
regulations which define the minimum operating and efficiency
standards that cogeneration facilities must meet and the benefits
to which they are entitled. 18 C.F.R. §§ 292.101-.211. The
regulations also authorize the FERC to revoke QF status for non-
compliance with its application and empower the FERC to waive
operating and efficiency standards upon a showing that the QF
produces significant energy savings. 18 C.F.R. § 292.205(c).
Additionally, the regulations address the purchase of energy by
utilities, and the cost to be paid to the QF supplying the energy
and guidelines for calculating such costs. 18 C.F.R. § 292.301-
.308. Thus, PURPA and the implementing regulations establish an
extensive federal system to encourage and regulate the sale of
electrical energy by QFs.
JCP&L claims that it and Freehold voluntarily agreed to
the BRC's continuing jurisdiction over the PPA and the rates
charged by Freehold thereunder. This argument is based upon the
BRC's unsuccessful effort in late 1993 to formulate a joint
agreement between the parties modifying the PPA. JCP&L also
asserts that in the course of the ongoing proceeding initiated by
the BRC to review the PPA, the BRC is reviewing documentary
evidence and testimony concerning the meaning of the PPA's
"regulatory-out" clause. JCP&L maintains that the regulatory-out
(..continued)
PURPA and the FERC regulation permitting the parties to hold
incremental avoidable cost at the level it has on the date the
PPA is effective. Whatever problem this may create is, however,
a matter for FERC, not the BRC. See also infra p. 30.
clause grants the BRC continuing jurisdiction over rates.
Finally, JCP&L argues that PURPA contains no express preemption
claims and that implied preemption is not to be lightly presumed.
In fact, it argues that there is a presumption against finding
preemption of state law in areas traditionally regulated by the
states.
Although the states are required under the federal
statutory scheme to implement the federal rules, section 210(e)
of PURPA requires that the FERC prescribe rules exempting QFs
"from state laws and regulations respecting the rates, or
respecting the financial or organizational regulation of electric
utilities, or from any construction of the foregoing, if the
Commission determines such exemption is necessary to encourage
cogeneration and small power production." 16 U.S.C. § 824a-
3(a)(1). As discussed earlier, the FERC promulgated regulations,
pursuant to section 210(e)(1) of PURPA, exempting QFs from
various federal and state regulatory requirements.
The BRC concedes that in adopting the regulation
exempting cogenerators from state utility regulation, the FERC
described the exemption as broad. It takes heart, however, in
FERC language stating that the exemption is "not intended to
divest a State regulatory agency of its authority to review
contracts for purchases as part of its regulation of electric
utilities." 45 Fed. Reg. 12,233 (Feb. 25, 1980). This
misunderstands the interplay between sections 210(a) and 210(e).
There is no dispute here that section 210(f) gives state
regulatory authorities power to implement the requirements of
section 210(a) and the relevant regulations. In fact, both
section 210(e)(3) and the applicable regulation, 18 C.F.R.
§ 292.602(c)(2), expressly limit the exemptions from state law
that QFs enjoy under § 210(e): QFs simply are not exempt from
state laws and regulations enacted pursuant to § 210(f) and, with
it, § 210(a).
Thus, if a case concerns implementation procedures
contemplated by § 210(f), then the action is properly covered by
§ 210(g), and, therefore, federal jurisdiction would be improper.
Here, on the other hand, the BRC's implementation of FERC's §
210(a)-type regulations ended with BRC's July 8, 1992 approval of
the PPA. The present attempt to either modify the PPA or revoke
BRC approval is "utility-type" regulation -- exactly the type of
regulation from which Freehold is immune under § 210(e). As the
explanatory note states, the regulations do not disturb the
authority of state regulatory agencies "to review contracts for
purchases" so long as those regulations are "consistent with the
terms, policies and practices of sections 210 and 201 of PURPA
and [FERC's] implementing regulations. If the authority or its
exercise is in conflict, . . . the State must yield to the
Federal requirements."
Absent legislative restriction, the BRC also asserts,
reconsideration of its prior approval of the PPA is inherent in
the authority of all administrative agencies and not necessarily
a characteristic unique to rate-making bodies. However, in this
instance, there is specific federal statutory legislation, PURPA,
that bars reconsideration of the prior approval of the PPA at
least absent some basis in the law of contracts for setting aside
the PPA. No such basis is referred to here. Based on the overall
scheme of PURPA and its stated goal, and especially section
210(e) and the implementing rules promulgated by the FERC, we
hold that Congress intended to exempt qualified cogenerators from
state and federal utility rate regulations.
Two recent cases support our conclusion. In
Independent Energy Producers, 36 F.3d 848, the Energy Producers
sought an injunction in the federal district court to prevent the
California Public Utilities Commission ("CPUC") from implementing
an order which delegated to the defendant-utilities the authority
to enforce federal operating and efficiency requirements set out
in PURPA and in the regulations promulgated by the FERC. As in
this case, the plaintiff QF and the utilities entered into
contracts for the sale and purchase of electric energy. The
contracts contained standardized terms and the rates to be paid
the QFs. In 1991, the utilities and the CPUC created a program
which authorized the utilities to monitor the compliance with
federal operating and efficiency standards by the QFs with which
they had contracts. If a utility determined that a QF did not
meet federal operating and efficiency standards, it was
authorized to suspend payment of the rates specified in the
contract and substitute a lower alternative rate. Independent
Energy Producers challenged this program, contending that the
FERC's authority is exclusive and the state program is preempted
by federal law. The district court disagreed and held there was
no preemption.
The court of appeals reversed. It concluded that the
FERC regulations carry out the statutory scheme reposed in its
exclusive authority to make QF determinations for the revocation
of QF status or waive compliance with QF standards, they nowhere
"contemplate a role for the state in setting QF standards or
determining QF status." Id. at 854. For reasons of policy, it
held that a "uniform federal decision maker is necessary" in the
public interest and that the CPUC program was preempted by
federal law. Id.
One of the issues raised in Smith Cogeneration, Inc. v.
Corporation Comm'n, 863 P.2d 1227 (Okla. 1993), is even more
analogous to this case. A rule of the Oklahoma Corporation
Commission required QFs and electrical utilities to include in
their non-negotiated cogeneration purchase contracts a notice
provision allowing reconsideration and modification by the
Corporation Commission of avoided costs after the contract had
been agreed upon. The cogenerator argued that the Corporation
Commission rule directly conflicted with PURPA and the FERC
regulations, discouraged cogeneration, and was preempted by
federal law. Although the cogenerator acknowledged that states
have broad authority to implement PURPA, it insisted that any
utility-type regulation over cogeneration contracts directly
conflicted with PURPA.
As Freehold does here, the cogenerator in Smith argued
that any attempt to revisit a cogeneration contract, as a result
of changed circumstances, deprives QFs of the benefits of the
bargain and that the state rule, unless waived, stands as a
direct obstruction to obtain the necessary financing for the
project. The Corporation Commission and the utilities argued to
the contrary.
The Oklahoma court, after examining the preamble to the
FERC regulations and PURPA, concluded that reconsideration of
long term contracts with established estimated costs imposes
utility-type regulations over QFs. "PURPA and FERC regulations
seek to prevent reconsideration of such contracts. The
legislative history behind PURPA confirms that Congress did not
intend to impose traditional utility type rate-making concepts on
sales by qualifying facilities to utilities." Id. at 1240-1241.
Accordingly, the court held that PURPA and FERC regulations
preempted the State Commission rule.
JCP&L attempts to distinguish this case from Smith on
the ground that the challenged rule in Smith would impact on
financing, but that in this case, the BRC's "pre-financing review
of the PPA will have no such impact." Such a distinction is
illusory. The Oklahoma court did not rest its preemption holding
merely on the impact of the Commission rule on financing, but
primarily on the obligation and rights of the parties under a
negotiated and executed contract. Here, the facts favor Freehold
more strongly than they did the cogenerator in Smith. In Smith,
the cogenerator did not yet have a signed contract; Freehold does
and the preemption issue is precisely the same. Besides, we
cannot disregard the impact on cogeneration financing if a
purchase power agreement is at any time in the future subject to
the arbitrary reconsideration by a state utility regulatory body.
Finally, the defendants maintain that preemption is
inappropriate because JCP&L and Freehold voluntarily agreed to
exempt the PPA from PURPA. They note correctly that FERC
regulations specifically contemplate voluntary agreements outside
of PURPA's umbrella. See 18 C.F.R. § 292.301(b); see also
American Paper Institute, Inc., 461 U.S. at 416 (stating that "a
qualifying facility and a utility may negotiate a contract" that
constitutes "a waiver" of PURPA). They claim that Freehold, in a
"regulatory-out" clause,12 agreed to waive its section 210(e) and
12
. The "regulatory-out" clause provides in pertinent part:
20.2(a) The parties recognize and
acknowledge that this agreement and the rates
to be paid to the Seller [Freehold] for
energy and capacity for the Facility are
premised upon and subject to the Company's
[JCP&L] continuing ability to timely and
fully recover from its customers all such
costs and charges paid to the Seller
hereunder for energy and capacity throughout
the term hereof. Consequently, in the event
that the BRC, the FERC or any legislative,
judicial, administrative or other
governmental agency having jurisdiction over
the parties, . . . should disallow in whole
or in part or otherwise impair the full and
timely recovery by the Company from its
customers of any energy and capacity payments
made or to be made to the Seller hereunder,
then, at the option of the Seller, (i) the
parties hereto shall promptly thereafter
commence negotiations to approximately amend
this Agreement to reduce the rates to be paid
by the Company hereunder for energy and
capacity to such rates as the BRC or such
other governmental agency exercising
jurisdiction shall have authorized the
Company to recover through operation of its
Levelized Energy Adjustment Clause ("LEAC") .
. . on a full and timely basis or (ii) upon
thirty (30) days prior written notice to the
18 C.F.R. § 292.602(c)(1) rights to be free from state rate
regulation or law.
As we have noted, insofar as the issues in this case
are concerned, we find the "regulatory-out" clause unambiguous.
It merely describes what would happen in the event that during
the 20-year contract term JCP&L should for any reason lose its
right to pass costs on to its ratepayers. When this clause was
agreed upon, the parties clearly did not expect that this right
could be lost as a result of BRC action absent some change in the
governing law.13 But the important aspect for present purposes
is that this clause does not purport to confer on the BRC any
jurisdiction it would not otherwise have. In particular, it
reflects no intent on the part of Freehold to surrender any of
the protection from state rate regulation conferred upon it by §
210(a).
V.
In summary, we conclude that the district court had
subject matter jurisdiction to consider Freehold's claims and
(..continued)
Company, the Seller may terminate this
Agreement and neither party shall have any
further liability or obligation hereunder
except for amounts due prior to the date of
termination . . . .
13
. In the BRC's 1992 order approving the PPA, the BRC committed
itself and its successors to "allow JCP&L to flow-through and/or
fully and timely recover the rates specified in [the PPA] and the
costs resulting therefrom . . . ."
A July 1, 1988, Stipulation and Settlement relied upon by the BRC
in approving the present PPA states that the BRC will not
readjust contract rates or preclude flow through.
that the jurisdictional limits of section 210(g) of PURPA did not
bar jurisdiction of this action. We also hold that the district
court erred in concluding that the Johnson Act precludes federal
jurisdiction and that Freehold's claim involves solely a
contractual dispute subject to the jurisdiction of the state
utility regulatory agency under the choice of law and forum
provisions of the PPA. We reject the argument that any of the
abstention doctrines apply in any manner to these proceedings.
Finally, we hold that once the BRC approved the power purchase
agreement between Freehold and JCP&L on the ground that the rates
were consistent with avoided cost, just, reasonably, and
prudentially incurred, any action or order by the BRC to
reconsider its approval or to deny the passage of those rates to
JCP&L's consumers under purported state authority was preempted
by federal law.
The order of the district court will be reversed and
the case remanded with direction to enter summary judgment in
favor of the appellant and for such further proceedings as are
consistent with this opinion. Costs taxed against the appellees.