Public Service Co. v. Patch

United States Court of Appeals
For the First Circuit

No. 00-1460

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, ET AL.,

Plaintiffs,

and

CONNECTICUT VALLEY ELECTRIC COMPANY and
CENTRAL VERMONT PUBLIC SERVICE CORPORATION,

Plaintiffs, Appellees,

v.

DOUGLAS L. PATCH, CHAIRMAN OF THE STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION, ET AL.,

Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Ronald R. Lagueux,* U.S. District Judge]

Before

Selya, Circuit Judge,

Bownes, Senior Circuit Judge,

and Boudin, Circuit Judge.

Gary Epler, General Counsel, New Hampshire Public Utilities

*Of the District of Rhode Island, sitting by designation.
Commission, with whom Michael E. Tucci, Steven K. White and
Morrison & Hecker L.L.P. were on brief for defendants Douglas L.
Patch, Susan S. Geiger and Nancy Brockway, Chairman and
Commissioners of the State of New Hampshire Public Utilities
Commission.
Philip T. McLaughlin, Attorney General, Stephen J. Judge,
Associate Attorney General, Civil Bureau, James K. Brown,
Kathleen O. Dias and Foley, Hoag & Eliot LLP on brief for Jeanne
Shaheen, Governor of New Hampshire, Amicus Curiae.
Sarah B. Knowlton, Steven V. Camerino and McLane, Graf,
Raulerson & Middleton, P.A. on joinder brief for City of
Claremont, New Hampshire, Amicus Curiae.
Lee A. Freeman, Jr. with whom John F. Kinney, James T.
Malysiak, Glynna W. Freeman, Freeman, Freeman & Salzman, P.C.,
Joseph M. Kraus, Senior Vice President and General Counsel,
Central Vermont Public Service Corporation, Dom S. D'Ambruoso,
John T. Alexander and Ransmeier & Spellman were on corrected
brief for plaintiffs Central Vermont Public Service Corporation
and Connecticut Valley Electric Company.

July 25, 2000
 BOUDIN, Circuit Judge. This appeal is the latest

installment in a series growing out of New Hampshire's efforts

to deregulate the electric utility industry and trim rates for

customers. 1 Familiarity with our prior decisions is assumed.

We repeat here only those facts pertinent to the present issue.

Connecticut Valley Electric Company ("Connecticut

Valley"), a small New Hampshire utility, provides retail

electric service to about 10,000 customers in New Hampshire.

Connecticut Valley purchases about 76 percent of its power from

its parent company, Central Vermont Public Service Corporation

("Central Vermont"), a Vermont utility, under a wholesale

requirements contract ("the RS-2 contract") that incorporates

cost-of-service rates ("the RS-2 rate schedule") filed with and

regulated by the Federal Energy Regulatory Commission ("FERC").

Connecticut Valley and Central Vermont have had a requirements

contract incorporating some form of the RS-2 rate schedule since

1982.

1Public Serv. Co. v. Patch, 962 F. Supp. 222 (D.N.H. 1997)
(Patch I); Public Serv. Co. v. Patch, 173 F.R.D. 17 (D.N.H.
1997) (Patch II); Public Serv. Co. v. Patch, 136 F.3d 197 (1st
Cir. 1998) (Patch III); Public Serv. Co. v. Patch, 167 F.3d 15
(1st Cir. 1998) (Patch IV); Public Serv. Co. v. Patch, 167 F.3d
29 (1st Cir. 1998) (Patch V), cert. denied, 526 U.S. 1066
(1999); Public Serv. Co. v. Patch, 202 F.3d 29 (1st Cir. 2000)
(Patch VI); Public Serv. Co. v. Patch, 87 F. Supp. 2d 57 (D.N.H.
2000) (Patch VII).

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 The RS-2 contract has a termination clause that, read

literally, permits either party to terminate the contract at the

end of a service year by giving written notice of termination

before the beginning of that service year. See Patch V, 167

F.3d at 32. Connecticut Valley and Central Vermont contend that

the termination clause was not intended to give either of them

the ability to terminate unilaterally on such short notice, but

the district court found it unnecessary to decide whether the

one-year termination clause allows Connecticut Valley to

terminate on the specified notice if and when its own interests

so dictate.

Central Vermont's rates under the RS-2 contract with

Connecticut Valley are higher than the current rates for

wholesale electricity available elsewhere in New Hampshire, due

in part to an expensive long-term contract by which Central

Vermont purchases from Hydro Quebec. In February 1997, as part

of its restructuring of electricity regulation in New Hampshire,

the New Hampshire Public Utilities Commission ("the Commission")

found that Connecticut Valley should have given notice of

termination of its RS-2 contract on or before December 31, 1996.

This finding was made in computing the so-called "stranded cost

recovery charge" that Connecticut Valley would otherwise be

allowed to recover from customers as part of the deregulation

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process. Re Connecticut Valley Elec. Co., Order No. 22,509

(Feb. 28, 1997) (the "Stranded Cost Recovery Order").2

Concerned that Connecticut Valley would terminate the

RS-2 contract and thereby leave Central Vermont alone with a

long-term obligation to buy expensive power from Hydro Quebec,

Central Vermont in June 1997 filed with FERC its own proposal to

terminate the RS-2 contract. However, it made termination

contingent on FERC allowing Central Vermont to add a "stranded

cost surcharge" on power delivered over its transmission lines

to customers in Connecticut Valley's service area. FERC

rejected that proposal as inconsistent with earlier FERC orders

and regulations, but decided to allow Central Vermont to file a

different plan that would impose an exit fee on Connecticut

Valley at the contract's termination, and thus ensure that

Connecticut Valley shared in the loss to Central Vermont that

would result from termination of the contract. See Central Vt.

Pub. Serv. Corp., 81 F.E.R.C. ¶ 61,336, at 62,543 (1997), aff'd,

--F.3d--, No. 98-1532, 2000 WL 762766 (D.C. Cir. June 30, 2000).

2
"Stranded costs" is a loose concept referring, in the
present context, primarily to investments that a utility made
during the period of monopoly service which are jeopardized by
deregulation--for example, by new obligations to allow the
utility's lines to be used by other suppliers. The
restructuring and deregulation process in New Hampshire,
including the statute and the Commission's evolving plan to
implement it, are described in detail in Patch IV, 167 F.3d at
18-22.

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 In December 1997, Central Vermont notified FERC that

it would seek a tariff amendment to establish an exit fee (to

recover its own stranded costs). The recovery of stranded costs

at the wholesale level is the subject of extensive FERC

regulation, recently sustained in almost all respects by the

D.C. Circuit in Transmission Access Policy Study Group v. FERC,

--F.3d--, Nos. 97-1715 et al., 2000 WL 762706, at *24 (D.C. Cir.

June 30, 2000). FERC accepted the proposed exit fee provision

for filing in March 1998. See Central Vt. Pub. Serv. Corp., 82

F.E.R.C. ¶ 61,237, at 61,908 (1998). A hearing has now been

held before an administrative law judge at FERC, but no decision

on either the propriety or the amount of the fee has yet been

issued.

In late December 1997, as the state's restructuring

proceedings continued, Connecticut Valley applied for a routine

increase in its 1998 retail rates to incorporate increases in

Central Vermont's RS-2 rate schedule. Such adjustments to the

RS-2 schedule are made periodically by Central Vermont to

reflect changes in its cost of acquiring power, and, in the

past, the Commission has allowed them to be passed through by

Connecticut Valley to its own customers. FERC accepted Central

Vermont's increased RS-2 rates for filing on January 13, 1998.

This time, instead of approving the requested increase, the

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state commission found Connecticut Valley imprudent for not

terminating the RS-2 contract sooner because power was available

for less money on the open market, and it disallowed the

requested increase. Connecticut Valley Elec. Co., Order No.

22,815 (Dec. 31, 1997) ("the Disallowance Order"). This finding

paralleled the reasoning behind its Stranded Cost Recovery

Order.

In the same period, litigation concerning New

Hampshire's plan for restructuring the electric utility industry

was proceeding in this court and the district court. In

December 1998, we upheld a preliminary injunction in which the

district court prohibited the Commission from implementing its

broad deregulation plan. Patch IV, 167 F.3d at 28-29. However,

in a companion decision, Patch V, we vacated the injunction to

the extent it required the Commission to allow Connecticut

Valley to recover through its retail rates the full cost of

wholesale power purchased under the RS-2 contract. 167 F.3d at

36. We found that Connecticut Valley had not shown a likelihood

that the Disallowance Order was enjoinable by a federal court

under the restrictive terms of the Johnson Act, 28 U.S.C. § 1342

(1994).

Our decision in Patch V permitted the Commission to

roll back Connecticut Valley's retail rates to the 1997 level.

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However, after that decision, the Commission ordered Connecticut

Valley to reduce its rates temporarily below the 1997 level in

order to refund to customers the higher rates they had paid

while the district court's preliminary injunction was in effect.

Connecticut Valley Elec. Co., Order No. 23,168 (Mar. 22, 1999)

("the Refund Order"). Connecticut Valley and Central Vermont

objected to the district court regarding this further reduction;

the district court agreed; and on April 7, 1999, it enjoined the

Commission from ordering the refund. The Commission again

appealed to this court.

In Patch VI, decided on January 24, 2000, we found that

the injunction against the Refund Order could not be sustained

on the basis thus far supplied, but allowed the district court

90 days to provide a sufficient basis for such an injunction.

202 F.3d at 34-35. The district court then sought to supply

that explanation and, at the same time, to dispose of the

parties' cross-motions for summary judgment as to the underlying

dispute. On March 6, 2000, the district court concluded that

Connecticut Valley and Central Vermont are entitled to a

permanent injunction allowing Connecticut Valley to pass through

to its retail customers the cost of wholesale power it purchases

from Central Vermont under the RS-2 contract. Patch VII, 87 F.

Supp. 2d at 65. The Commission now appeals.

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 The district court's summary judgment decision, which

we review de novo, Wightman v. Springfield Terminal Ry. Co., 100

F.3d 228, 230 (1st Cir. 1996), rested in major part on an order

of the Commission issued on July 22, 1998, in which the

Commission vacated a directive in its February 1997 Stranded

Cost Recovery Order, Re Statewide Elec. Util. Restructuring

Plan, Order No. 22,986 (July 22, 1998) ("the Vacation Order").

In particular, the Vacation Order canceled the Commission's

prior directive instructing Connecticut Valley to terminate the

RS-2 contract. Because the Commission no longer demanded that

Connecticut Valley terminate its RS-2 Contract on the basis of

its "imprudence," the district court ruled that federal law

required the Commission to allow recovery of the federal tariff

rate for purchases under that contract. Patch VII, 87 F. Supp.

2d at 64-65.

We begin our review with the main legal constraint that

governs federal injunctions against state utility rates. Where

such relief is sought, it is not enough for the utility to

establish federal jurisdiction and a claim for relief on the

merits; it must also show that the injunction comports with the

Johnson Act, which allows such injunctions only under very

limited conditions. One such condition is where the state rate

order conflicts with a federal statute or a federal agency

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action. See Patch V, 167 F.3d at 33 (citing case law). The

showing of such a conflict would normally satisfy the Johnson

Act and make out a federal claim for relief. See, e.g.,

Mississippi Power & Light Co. v. Mississippi, 487 U.S. 354, 377

(1988).

The issue in this case is not about these principles,

which are well-settled, but about whether on the facts before us

the challenged orders of the state commission are inconsistent

with a federal regulatory scheme. Patently, the state

commission is refusing to allow Connecticut Valley to collect

revenues to pay the full federal tariff rate for the power it is

buying from Central Vermont under the RS-2 tariff; indeed, the

refund ordered by the Commission is designed to make Connecticut

Valley give back to customers some of the revenue it collected

for that purpose.

Of course, FERC has not ordered the state commission

to do anything; it has merely allowed Central Vermont to file a

federal tariff (the RS-2 tariff) setting a rate for wholesale

power sales to Connecticut Valley. But if the purchase is not

improper, then the refusal of the state commission to allow the

purchasing utility to pay the federal tariff rate, and include

that cost in its own rates, is inconsistent with the federal

scheme. The reason is that the rates set by the FERC tariff are

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binding unless and until altered by FERC. See Mississippi Power

& Light Co., 487 U.S. at 371-74; Nantahala Power & Light Co. v.

Thornburg, 476 U.S. 953, 970 (1986).

Nevertheless, while the Supreme Court left the issue

open, we held in Patch V that a state commission could disallow

costs, even where they reflected payments required under a

federal tariff, where the state agency had a colorable

independent state ground for finding that the purchaser should

not have made the purchase. 167 F.3d at 35; see also Kentucky

W. Va. Gas Co. v. Pennsylvania Pub. Util. Comm'n, 837 F.2d 600,

608-09 (3d Cir.), cert. denied, 488 U.S. 941 (1988). And,

initially, the Commission did make a colorable ruling in its

Disallowance Order that Connecticut Valley's continued

purchasing from Central Vermont was imprudent, given Connecticut

Valley's apparent opportunity to terminate its contract on one

year's notice and switch to cheaper--albeit possibly short-term-

-power from other suppliers.

But faced with the threat of termination, Central

Vermont then filed a tariff amendment that now threatens to

impose a heavy termination charge on Connecticut Valley if it

does cancel its contract. FERC (which more or less invited the

amendment) has allowed the amendment to go into effect

provisionally and, while FERC may in due course disallow the

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charge or reduce its amount, the amendment is in force for the

time being. See 82 F.E.R.C. ¶ 61,237, at 61,909 (1998)

("Central Vermont's proposed exit fee is hereby accepted for

filing and suspended for a nominal period, to become effective

on March 14, 1998, subject to refund . . . ."). Further, the

state commission has now, in its Vacation Order, explicitly

withdrawn the prior ruling that Connecticut Valley should

terminate its requirements contract. In sum, the Commission's

prior justification for disallowing the pass-through has

evaporated.

The Commission says on appeal that its Vacation Order

only nullified its prior order requiring Connecticut Valley to

terminate the contract and did not affirmatively order the

utility to continue buying under the contract. The lack of an

affirmative order is irrelevant: the RS-2 contract requiring

purchases is binding on Connecticut Valley unless terminated;

termination now apparently would be self-defeating because it

would give rise to the prospect of a potentially heavy financial

penalty that the state commission does not want;3 and so long as

3
Seemingly, a large exit fee would negate the savings
realized from having Connecticut Valley purchase cheaper power
in the short term from wholesalers other than Central Vermont;
and, of course, Connecticut Valley would also lose the long-term
rate protection afforded Connecticut Valley's customers by the
long-term contract between Central Vermont and Hydro Quebec.

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purchases from Central Vermont continue to be legitimately made

under the contract, Connecticut Valley must pay the FERC tariff

rate, and the state commission must allow it to reflect that

rate in its own charges.

Alternatively, the Commission says that even if current

conditions make it prudent to continue the purchases, the

contract could and should have been terminated before Central

Vermont filed the termination charge. However, read literally,

FERC regulations say that Central Vermont could have imposed the

termination charge, assuming it were otherwise justified,

whenever Connecticut Valley sought to terminate its contract--so

long as the contract was still in force when the charge was

filed. 18 C.F.R. § 35.26(c)(1)(v) (1999). The RS-2 contract

required at least one-year's notice before termination became

effective.

The Commission points to language in the original FERC

order adopting such regulations, arguably contrary to the

present regulation itself, saying that a selling utility could

not add an exit fee after a purchasing utility "gives notice" of

termination. Order No. 888, Promoting Wholesale Competition

Through Open Access Non-Discriminatory Transmission Services by

Public Utilities; Recovery of Stranded Costs by Public Utilities

and Transmitting Utilities, 61 Fed. Reg. 21,540, 21,642 n.679

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(1996). However this arguable tension between the regulation

and order may be resolved, it is hard to see how Connecticut

Valley--a wholly-owned subsidiary--could have effected a

surprise termination. 4 Also, the FERC order says that even

where notice is given, the seller could still recover its

stranded costs through transmission charges to the canceling

utility. Id.

Finally, the Commission, joined in a separate amica

curiae brief by the Governor of New Hampshire, claims that

whether the continued purchases are imprudent under state law is

a matter for the Commission and the state courts, and that the

district court's injunction is inconsistent with the so-called

Burford doctrine. See Burford v. Sun Oil Co., 319 U.S. 315,

332-34 (1943). Burford, discussed at some length in Patch IV,

167 F.3d at 24, aims to prevent federal courts from "bypassing

a state administrative scheme and resolving issues of state law

and policy that are committed in the first instance to expert

administrative resolution." Id.

4Even if we put aside the fact that Connecticut Valley is a
wholly-owned subsidiary of Central Vermont, it would have been
easy enough for Central Vermont, at the first sign of an intent
to terminate or at any sign of pressure from the Commission on
Connecticut Valley to terminate, to file its termination charge
with FERC. Indeed, this is more or less what happened.

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 However, we are not concerned here with whether the

imprudence finding is proper under state law but rather with

whether, given its substance and context, it furnishes a basis

for the state commission to ignore an otherwise controlling FERC

tariff. In such cases, the "adequacy" of an asserted

"independent state ground" is--indeed, under the Supremacy

Clause must be--an issue of federal law. 5 Burford does not

license a state to ignore FERC tariffs merely by saying, without

any present rational basis, that the purchase is "imprudent."

This is so even if the Commission's "imprudence" finding has not

been withdrawn and is still tolerated under state law.

Nor is it of any moment whether the Commission has, or

has not, acted in good faith in refusing to allow Connecticut

Valley to collect the FERC tariff charges. Indeed, we assume

throughout that the Commission is motivated simply by a desire

to secure lower rates for New Hampshire consumers. But absent

a colorable objective justification, the state agency may not

disallow, in state rate-making proceedings, costs that were

5See Howlett v. Rose, 496 U.S. 356, 366 (1990) ("The
adequacy of the state-law ground to support a judgment
precluding litigation of the federal claim is itself a federal
question which we review de novo."); see also Wolfe v. North
Carolina, 364 U.S. 177, 185-86 (1960); Staub v. City of Baxley,
355 U.S. 313, 318-19 (1958); Ward v. Board of County Comm'rs,
253 U.S. 17, 22-23 (1920).

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incurred under a federal tariff for a permissible purchase of

wholesale power.

Affirmed.

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