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Crossroads Cogeneration Corp. v. Orange & Rockland Utilities

October 27, 1998

CROSSROADS COGENERATION CORPORATION APPELLANT
v.
ORANGE & ROCKLAND UTILITIES, INC.



Before: Stapleton and Nygaard, Circuit Judges, and SCHWARTZ,*fn1 District Judge

The opinion of the court was delivered by: Stapleton, Circuit Judge.

On Appeal From the United States District Court For the District of New Jersey (D.C. Civil Action No. 96-cv-05287)

Argued April 23, 1998

OPINION OF THE COURT

This appeal is from the dismissal of all counts of a complaint filed by Crossroads Cogeneration Corporation ("Crossroads") against Orange and Rockland Utilities, Inc. ("O&R"). The district court dismissed Crossroads' breach of contract claim and related claims on the ground that they were barred by issue and claim preclusion, and dismissed Crossroads' antitrust claims for failure to state a claim upon which relief could be granted. We will reverse in part and affirm in part.

I.

Crossroads, a Delaware company, is an independent producer of electric power that owns and operates a cogeneration facility in Mahwah, New Jersey, its principal place of business. O&R is a New York corporation that operates as a public utility in four counties in New York, New Jersey, and Pennsylvania. In each county in which O&R operates, it is virtually the sole retail provider of electric power to residential, commercial, and industrial customers. Most of the energy O&R provides to customers is purchased from relatively small, independent generators of energy, such as Crossroads. This dispute arises from a power purchase agreement governing the sale to O&R of electricity generated by Crossroads. Before examining the dispute in any detail, however, it is first necessary to review the regulatory context of the agreement.

A.

Under the Federal Power Act, 16 U.S.C. § 791a et seq., the Federal Energy Regulatory Commission ("FERC") is responsible for regulating "public utilities" that offer electric power in interstate commerce. In the midst of a national energy crisis in 1978, Congress modified the Federal Power Act by enacting the Public Utility Regulatory Policies Act ("PURPA"), 16 U.S.C. § 823a et seq. Congress' overall strategy was 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." Freehold Cogeneration Associates, L.P. v. Board of Regulatory Comm'rs of New Jersey, 44 F.3d 1178, 1182 (3d Cir. 1995). One chosen means to this broad end was to encourage the development of cogeneration facilities, which produce both electric and thermal energy from a single fuel source.

Developing a market for cogeneration facilities required overcoming both the reluctance of traditional electric utilities to purchase power from independent providers and the financial burden of state and federal regulation on nontraditional facilities. See FERC v. Mississippi, 456 U.S. 742, 750-51 (1982). To address the first barrier, PURPA creates incentives by requiring FERC to prescribe "such rules as it determines necessary to encourage cogeneration and small power production," including rules to"require electric utilities to offer to . . . purchase electric energy from [cogeneration] facilities." 16 U.S.C. § 824a-3(a). At the same time, to address the burden of regulation, PURPA requires FERC to prescribe rules to exempt small production facilities from many provisions of the Federal Power Act and "from State laws and regulations respecting the rates, or respecting the financial or organizational regulation, of electric utilities." 16 U.S.C. § 824a-3(e).

Acting pursuant to its authority under PURPA, FERC has promulgated regulations governing transactions between cogeneration facilities and electric utilities, including provisions requiring electric utilities to purchase energy from qualifying facilities ("QFs") at a rate up to the utility's full avoided cost.*fn2 In addition, FERC has also promulgated regulations exempting QFs from state regulatory requirements. Those regulations provide, in relevant part, that:

"Any qualifying facility 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)(1).

Despite the existence of FERC regulations governing QFs and the exemption of QFs from certain federal and state regulations applicable to traditional electric utilities, state regulatory authorities are required to implement FERC rules. See 16 U.S.C. § 824a-3(f). Thus state agencies are actively involved in the formation and performance of contracts between traditional utilities and QFs; in particular, state authorities must review and approve power purchase agreements before they take effect.

B.

In October 1987, O&R entered into a contract with a QF for the purchase of electric energy for a period of twenty years. In 1990, Crossroads purchased the QF 's facility and it assigned the agreement to Crossroads.*fn3 Pursuant to FERC regulations, the agreement required approval by the New York Public Service Commission ("NYPSC"), the state agency responsible for regulating electric utilities. After several changes were made at the NYPSC's request, the required approval was granted in December of 1988. The agreement provided that Crossroads' predecessor would supply energy to O&R from a cogeneration facility that "initially will be designed to generate nominally 3.*fn4 MW of capacity and to generate approximately 26,300 MWH of electric energy annually." App. at 65. The facility was initially constructed with three combustion engines, each of which had a generating capacity of approximately 1.1 MW. However, the agreement anticipated that the plant might eventually grow in size, and the parties accordingly agreed upon the Disposition of any capacity in excess of 3.3 MW:

"[Crossroads] shall deliver and sell to [O&R] and [O&R] shall accept and purchase from [Crossroads], subject to the terms and conditions of this agreement, all the capacity produced by the Plant, up to a maximum of 4 MW, and all energy associated with such capacity, net of that capacity and energy used from time to time to operate the Plant. No change in the amount of capacity committed hereunder shall be permitted without the written consent of [O&R] and [Crossroads]. [Crossroads] shall have the right to sell to third parties or make alternate Dispositions of all the capacity produced by the Plant in excess of 4 MW and all energy associated with such excess capacity; provided, however, that [O&R] shall have a right offirst refusal to purchase such excess capacity and energy for the price set forth herein." App. at 70.

Thus, despite the 3.3 MW initial capacity, the agreement (1) requires O&R to purchase at the contract price all energy produced up to 4 MW; (2) reserves to O&R a right of first refusal in allocating any energy in excess of 4 MW; and (3) provides that Crossroads may sell on the open market any energy above 4 MW that O&R refuses.

This dispute arose in May 1996, when Crossroads constructed and began operating a new gas turbine at the facility, capable of generating 5 MW of power. O&R refused to pay the contract price for energy generated by the new turbine, while Crossroads claimed that O&R was obligated under the agreement to purchase all energy generated by the original or new equipment up to a capacity of 4 MW. O&R filed a petition with the NYPSC asking for a declaratory ruling that it was not obligated to"purchase energy produced by the [new] Turbine at the prices set forth in the Agreement." App. at 63. Though acknowledging that the terms of the agreement required it to purchase "all the capacity produced by the Plant up to a maximum of 4 MW," App. at 57, O&R argued that it would nonetheless be unfair to require it to purchase energy from the new turbine.

O&R's petition contended that the rates set forth in the agreement are substantially higher than the market would bear today, a result of policies in the 1980s that provided subsidies to cogeneration facilities. Since the plant's capacity was 3.3 before addition of the new turbine, O&R had not been paying for the full 4 MW of energy prior to addition of the new turbine. With the new turbine, Crossroads would easily fulfill the 4 MW that O&R was obliged to purchase under the agreement. Because O&R is locked into what it perceives is above-market rates, it charged that Crossroads was "seek[ing] to circumvent the terms and spirit of the Agreement by supplementing the availability of the Original Generators with the output from the Turbine." App. at 61. O&R estimated that it would be required to pay an additional $4.2 million to Crossroads for the additional energy over the life of the contract, concluding that "[r]equiring [its] ratepayers to subsidize Crossroads [was] simply inappropriate." App. at 61.

Crossroads opposed O&R's petition before the NYPSC. Citing a decision of this Circuit, Freehold Cogeneration Associates v. Board of Regulatory Comm'rs of New Jersey, 44 F.3d 1178 (3d Cir. 1995), Crossroads argued that once a state utility commission approves the terms of a power purchase agreement, "any action . . . to reconsider its approval" is preempted by PURPA. 44 F.3d at 1194. Crossroads also cited NYPSC precedent suggesting that the agency usually refused to get involved in contract disputes between utilities and their suppliers. Finally, Crossroads contended that the issue was more complex than O&R's petition made it out to be, and requested an opportunity to supplement the record should the Commission decide to exercise jurisdiction.

The NYPSC granted O&R's petition. The Commission determined that it had authority to review the petition because of its power to "interpret [its] power purchase contract approvals." App. at 172. The NYPSC found that O&R's petition could be read as a request for it to explain and interpret whether the earlier approval of the contract included the additional capacity created by the new turbine. The Commission concluded that "[u]nder the approval . . . Crossroads may not supplement electricity produced by its [original] engine capacity with electricity produced from its new turbine capacity." App. at 173. Thus, the Commission ordered that electricity generated by the new turbine could not be priced at the contract rate.

Crossroads then filed this action, seeking recovery for breach of contract and antitrust violations.3 O&R moved to dismiss Crossroads' claims under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. Crossroads cross-moved for summary judgment on all claims. The district court granted O&R's motion and denied Crossroads' motion. The district court determined that: (1) the contract claims*fn5 all are "premised on [Crossroads'] contention that[O&R] breached its obligations under the terms of the Agreement by refusing to pay the contract price for energy generated by the new gas turbine," Op. at 15; (2) Crossroads is barred by principles of issue and claim preclusion from litigating the issue of whether the agreement requires purchase of energy from the new turbine because that issue was litigated and determined before the NYPSC; (3) Crossroads' argument that the NYPSC did not have jurisdiction to construe the contract is also barred by operation of the "jurisdictional ...


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