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GRAYS FERRY COGENERATION PSHP. v. PECO ENERGY CO.

March 19, 1998

GRAYS FERRY COGENERATION PARTNERSHIP, et al.
v.
PECO ENERGY COMPANY, et al.



The opinion of the court was delivered by: DALZELL

 Dalzell, J.

 March 19, 1998

 Alleging that a $ 158 million power generation enterprise will in a matter of weeks go out of business by reason of its primary customer's wrongdoing, plaintiffs on March 9, 1998 filed this action and a motion for preliminary injunction to prevent this feared catastrophe.

 I. The Basic Legal Landscape

 Under the Federal Power Act, 16 U.S.C. § 791a et seq., any entity that owns or operates facilities used to transmit or sell electric energy in interstate commerce is subject to the jurisdiction and regulatory powers of the Federal Energy Regulatory Commission ("the FERC"). See 16 U.S.C. § 824. In 1978, amid the then-energy crisis, Congress amended the Federal Power Act with the enactment of the Public Utility Regulatory Policies Act ("PURPA"). Congress adopted PURPA to encourage the development of alternative energy sources in an effort to reduce dependence on foreign oil. Congress believed that two significant obstacles impeded the development of alternative energy sources: first, the reluctance of traditional electric utilities to purchase energy from, and sell energy to, non-traditional facilities, and, second, the substantial financial burdens imposed on non-traditional facilities by pervasive federal and state regulation. See FERC v. Mississippi, 456 U.S. 742, 750-51, 72 L. Ed. 2d 532, 102 S. Ct. 2126 (1982) (citing legislative history of PURPA).

 To overcome the first obstacle to development of nontraditional sources, PURPA requires electric utilities to purchase electric energy produced by independent power producers operating so-called "qualifying cogeneration facilities" ("QFs"). *fn1" See 16 U.S.C. §§ 796(18)(B), 824a-3. Congress directed the FERC to promulgate rules and regulations governing the terms of such purchases and sales, and state agencies such as the PUC are empowered to implement the rules and regulations. *fn2" See 16 U.S.C. § 824a-3(f).

 To overcome the second obstacle, 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(e)(1). *fn3"

 II. The Facts Here

 Plaintiff Grays Ferry is a joint venture Pennsylvania partnership that was formed by three different entities, plaintiff Trigen-Schuylkill, plaintiff NRGG, and defendant Adwin. *fn4" Grays Ferry was created to build and operate a QF in the Grays Ferry section of Philadelphia which would produce both electricity and steam ("the facility"). In the early 1990s, PECO and Grays Ferry entered into several agreements known as "Power Purchase Agreements" ("PPAs"). Pursuant to the PPAs, Grays Ferry agreed to sell to PECO, and PECO agreed for a period of twenty years to purchase from Grays Ferry, the net electric output of the facility at rates set forth in the agreement, beginning with the date of commercial operation.

 On September 28, 1992, PECO filed with the PUC a petition for the approval of the original PPAs with Grays Ferry and for approval of recovery from PECO ratepayers of amounts it would pay for the electric energy produced. *fn5" By its March 15, 1993 Order, the PUC approved PECO's petition, and held that the PPAs represented an inexpensive source of electrical energy to PECO ratepayers and were "reasonable and consistent with the public interest." Plaintiffs' Complaint Exhibit F at p.8. The PUC also held that PECO was authorized to "fully collect all amounts paid to Grays Ferry Cogeneration Partnership under the terms of this agreement, on a full and current basis in its Energy Cost Adjustment or such mechanism as may replace its Energy Cost Adjustment in the future." Id.

 On March 2, 1994, PECO filed a supplemental petition with the PUC for approval of various revisions and addenda to the PPAs with Grays Ferry. By Order of February 9, 1995, the PUC granted PECO's supplemental petition, and again approved the PPAs, which then included the two contingent capacity purchase agreements. See Plaintiffs' Complaint Exhibits D, E.

 Subsequent to the PUC's approval of the PPAs between PECO and Grays Ferry, the Grays Ferry partnership took a number of steps. It entered into credit facilities with Chase Manhattan Bank and a syndicate of banks to provide $ 113 million in senior bank financing, arranged for $ 15 million in subordinated debt from Westinghouse Electric Corporation, and obtained at least $ 30 million in cash equity from the partners. The credit facility, the subordinated debt, and equity contributions were based upon the revenue projections anticipated from the twenty-year PPAs between PECO and Grays Ferry.

 After eighteen months of construction, Grays Ferry began start up and testing in October of 1997. In a press release announcing the start up and testing, PECO represented that it had a long-term agreement with Grays Ferry, and that the electricity produced was enough to power seven office buildings or 45,000 homes. See Plaintiffs' Complaint Exhibit G. The Grays Ferry facility began commercial operation two months later.

 In addition to electric generation and sales to PECO, Grays Ferry also sells the steam the facility produces to plaintiff Trigen-Philadelphia, a local steam utility. On May 18, 1994, Trigen-Philadelphia and the University of Pennsylvania entered into a steam agreement ("the Penn Agreement"), providing that for a twenty-year term Trigen-Philadelphia will sell steam to the University. See Plaintiffs' Complaint Exhibit H. Plaintiffs assert that University of Pennsylvania is Trigen-Philadelphia's largest customer, accounting for about twenty-six percent of Trigen-Philadelphia's total annual billings, and that Grays Ferry produces most of the steam for Trigen-Philadelphia's purchases for the University. Trigen-Philadelphia also alleges that if it does not place the University of Pennsylvania's steam equipment into service by December 31, 1998, the University has the option of terminating the contract without a penalty. See Plaintiffs' Complaint Exhibit H at P 6.2(d).

 In December of 1996, the Pennsylvania General Assembly enacted the "Electricity Generation Customer Choice and Competition Act," 66 Pa. Cons. Stat. Ann. § 2801 et seq. ("the Customer Choice Act" or "the Act"), which was intended to foster competition in retail electricity marketing and allow retail customers to choose among electric generation suppliers. Pursuant to the Customer Choice Act, the movement toward greater retail competition was to be phased-in over a period of time. During the transition to greater competition, the Act allowed the PUC to take steps to ameliorate the effects of this change. See 66 Pa. Cons. Stat. Ann. § 2802(8).

 Recognizing that many of the public utilities had long-term contracts that created costs that might not be recoverable in a competitive market, the Customer Choice Act empowered the PUC to determine the level of transition or "stranded costs" for each electric utility and to provide a mechanism called the "competitive transition charge" for the recovery of such stranded costs. In fact, the Act specifically defines "transition" or "stranded costs" to include "cost obligations under contracts with non-utility generating projects which have received a [PUC] order." 66 Pa. Cons. Stat. Ann. § 2803. In addition, the Act provides that the PUC "shall" allow ...


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