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Freehold Cogeneration Associates, L.P. v. Board of Regulatory Com'rs of State of N.J.

filed: January 9, 1995.

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.

Before: Stapleton, Hutchinson, and Rosenn, Circuit Judges.

Author: Rosenn

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.*fn1

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 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.*fn2 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 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.*fn3

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 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, 72 L. Ed. 2d 532, 102 S. Ct. 2126 (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 "state 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, 77 L. Ed. 2d 490, 103 S. Ct. 2890 (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 ...


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