Consolidated Edison Co. v. Public Service Commission

Responding to the nationwide energy crisis, Congress enacted PURPA in 1978 for the purpose of encouraging the development of alternate energy sources, in order to reduce this country’s dependence on traditional fossil fuels (see FERC v Mississippi, 456 US 742 , 750). Accordingly, section 210 of PURPA (16 USC § 824a-3 [a]) mandates the Federal Energy Regulatory Commission (FERC) to prescribe rules that will foster development of qualifying cogeneration facilities and qualifying small power production facilities.^[1] By further directing FERC to promulgate rules requiring electric utilities to offer to sell and purchase electric energy to and from such Federal qualifying facilities, Congress hoped to eliminate one of the central problems that had hindered the development of alternate energy sources: traditional electric utilities were reluctant to buy power from, or sell power to the alternate power producers (see FERC v Mississippi, supra, at p 750 , and n 12).

With respect to the regulatory rates established by. FERC for purchases by electric utilities, PURPA directs that they be (1) just and reasonable to the electric consumers of the utility, (2) in the public interest, and (3) not discriminatory against qualifying cogenerators or small power producers (see 16 USC § 824a-3 [b]). PURPA further limits the purchase rate by providing that FERC may not establish a rate that exceeds the purchasing utility’s “avoided cost”^[2] (see id.).

A second barrier to alternate energy producers was the applicability of voluminous Federal and State utility regulations, involving tremendous amounts of paperwork. To

avoid financially and administratively overburdening qualifying facilities, section 210 of PURPA authorizes FERC to exempt many Federal qualifying facilities from certain Federal and State laws, including the Federal Power Act (FPA) (see 16 USC § 824a-3 [e] [1]; 18 CFR 292.601), when deemed necessary in order to encourage alternate power producers to enter the field (see FERC v Mississippi, 456 US 742 , 750-751, supra; 1978 US Code Cong & Admin News, p 7832).

After the enactment of PURPA, New York State passed a similar law in 1980 (L 1980, ch 553, § 7, as amd by L 1981, ch 843, § 9, Public Service Law, § 66-c). Its purpose is to promote State energy goals of development of alternate energy production facilities, cogeneration facilities, and small hydro facilities (see Public Service Law, § 66-c; State Energy Master Plan, Final Report, vol I, pp 5-10, 29-30 [3/82]). To encourage this development, the law requires electric utilities to both sell and purchase power produced by State qualifying facilities (see Public Service Law, § 66-c, subd 1). Generally, those facilities that qualify under PURPA in this State also qualify under the State law (see Public Service Law, § 2, subds 2-a, 2-b, 2-c).^[3]

Like PURPA, section 66-c of the Public Service Law requires that the purchasing rates by a utility from a State qualifying facility be just, nondiscriminatory, and in furtherance of the public policy behind the legislation. The State statute differs from PURPA, however, in that it prescribes a uniform minimum purchase price of 6 cents per kilowatt hour for electricity purchased by a utility from a State qualifying facility, rather than PURPA’s variable avoided-cost purchase rate. This State’s minimum purchase rate may at times exceed a utility’s avoided cost, the maximum purchase rate for energy from a Federal qualifying facility that can be required by FERC under PURPA (see 16 USC § 824a-3 [a]; 18 CFR 292.304 [a] [2]).

After conducting hearings to implement the Federal and State legislation and regulations, respondent Public Service Commission (PSC) determined, among other things, that petitioner Consolidated Edison must offer to purchase electric energy from on-site generation facilities^[4] that qualify under either Federal or State law, or both. It also required petitioner, under State law, to offer to purchase at a rate of at least 6 cents per kilowatt hour from State qualifying facilities and at a rate of at least avoided cost from any purely Federal qualifying facility under PURPA.

On September 9,1982, petitioner commenced this article 78 proceeding challenging, on Federal preemption grounds, these two aspects of the PSC’s determination.

The Appellate Division granted the petition, in part, holding that the FPA and PURPA preempted the area and, therefore, that FERC had exclusive jurisdiction to determine rates for sales of electricity at wholesale by on-site generators. The court modified the determination of the PSC by declaring that the State could only require petitioner to offer to purchase electricity from on-site generators that were Federal qualifying facilities. The required purchase of electricity from purely State qualifying facilities, however, was deemed to be under the preemptive blanket of the FPA. Further, the State requirement of a 6 cents per kilowatt hour minimum purchase rate was held invalid to the extent it conflicted with the Federally mandated maximum rate of avoided costs.

The first issue is whether PURPA preempts State regulation requiring electric utilities to purchase power from Federal qualifying facilities at a rate in excess of the avoided cost purchase rate required under PURPA. This court holds that PURPA has no such effect.

Based upon the Supremacy Clause of the United States Constitution (see US Const, art VI, cl 2), Federal law will prohibit the enforcement of State regulation in several circumstances. Preemption^[5] will arise if the Federal stat

avoided-cost purchase rate and the 6 cents per kilowatt hour purchase rate set by the Public Service Law;^[6] second, on the ground that the State’s 6 cents per kilowatt hour rate thwarts accomplishment of the Congressional objective that consumer rate payers not be required to subsidize the development of alternate energy producers. Subsidies allegedly would occur because the utilities would pass their increased costs of purchasing power from the alternate producers through to the ultimate consumer in the form of increased rates.

The flaw in petitioner’s direct conflict argument is that it is based upon the faulty assumption that the Federal maximum purchase rate of avoided costs was intended to be the absolute ceiling on the price that could be set by either the Federal or State regulatory authorities. This analysis begs the question of whether Congress intended only to establish a maximum rate that could be imposed by Federal regulations and to leave room for the States to separately encourage alternate power production by imposing higher rates for utility purchases of power from Federal qualifying facilities.

This court holds that there is no direct conflict between PURPA’s maximum purchase rate and the Public Service Law’s higher minimum purchase rate. The language of PURPA and its legislative history indicate that the PURPA avoided-cost rate is only the maximum in the context of the Federal Government’s role in encouraging alternate power production (see 16 USC § 824a-3 [b] [it is only a “rule prescribed (by FERC) under subsection (a)” that may not require purchase rate higher than avoided cost to utility]; Joint Explanatory Statement of Committee of Conference on PURPA, 1978 US Code Cong & Admin News, pp 7831-7832 [FERC regulation making full avoided costs the purchase rate was “meant to act as an upper limit on the price at which utilities can be required under this section to purchase electric energy”, implies leaving room

for requirements imposed outside this section under State law (emphasis added)]).^[7]

Moreover, FERC determined that independent, complimentary State regulation in the field was not supplanted by PURPA but could be used to expand the Federal PURPA-based incentives.^[8] As the administrative agency charged by Congress with implementation of PURPA (see 16 USC § 824a-3 [a], [h]), FERC’s interpretation should ordinarily be deferred to (see Zenith Radio Corp. v United States, 437 US 443 ,450; Train v Natural Resources Defense Council, 421 US 60 , 87), unless it is arbitrary, capricious or an abuse of discretion (see American Paper Inst. v American Elec. Power, 461 US 402 , 411-414, and n 7).

decreased reliance on fossil fuel and increased energy efficiency would benefit the ratepayers and the Nation as a whole (see id.), was accepted by the court as reasonable and, therefore, was upheld (see American Paper Inst. v American Elec. Power, 461 US 402 , 414-416, supra). Thus, failure to achieve consumer ratesavings is not necessarily abhorrent to the primary purpose of PURPA, which is to encourage development of cogeneration and small power facilities (see id., at pp 404-406, supra).

Similarly, while it is recognized that ratesavings may not be achieved for consumers under section 66-c of the Public Service Law because the 6 cents per kilowatt hour rate may at times exceed current avoided costs, at least in the short run^[9] (see Governor’s Bill Jacket, L 1981, ch 843; Governor’s Memorandum on approval of L 1981, ch 843, 1981, McKinney’s Session Laws of NY, pp 2627-2628), the rate does nevertheless further PURPA’s objective because it encourages alternate energy production, and in a manner suited to the needs of this State.

In sum, as none of the criteria for preemption are present, the PSC has the authority to require utilities to offer to purchase power from Federal qualifying facilities (including those which qualify under both PURPA and the Public Service Law). The PSC may also require a utility to offer to purchase power from Federal qualifying facilities at a minimum rate of 6 cents per kilowatt hour^[10] in accordance with section 66-c of the Public Service Law.

The second issue is whether part II of the Federal Power Act (FPA) (see 16 USC § 824 et seq.) preempts the PSC from compelling utilities to offer to purchase power from facilities that qualify only under the Public Service Law.

This court holds that it does. The FPA would also preempt State regulation of the Federal qualifying facilities in New York except that they are exempted from the

FPA under subdivision (e) of section 210 of PURPA (see 16 USC § 824a-3 [e]; 18 CFR 292.602). The purely State qualifying facilities, however, are not eligible for this Federally authorized exemption because they are not covered by PURPA.^[11]

Part II of the FPA applies “to the sale of electric energy at wholesale in interstate commerce” ( 16 USC § 824 [b]). Such a sale is in “interstate commerce” if the electric energy is “transmitted from a State and consumed at any point outside thereof” ( 16 USC § 824 [c]). The FPA was enacted to “fill the gap” left by the Supreme Court’s decision in Public Utilities Comm. v Attleboro Co. ( 273 US 83 ), which held that the States lacked power to regulate interstate sales of electricity at wholesale. Exclusive regulatory authority was delegated to FERC under the FPA (see New England Power Co. v New Hampshire, 455 US 331 , 340).

There is no dispute that if transactions between petitioner and purely State qualifying facilities for the purchase of electricity are sales at wholesale in interstate commerce, the FPA preempts any State regulation in the area (see New England Power Co. v New Hampshire, supra, at pp 340-341 ; F. P. C. v Southern Cal. Edison Co., 376 US 205 , 210).

The PSC asserts two arguments refuting FERC’s exclusive jurisdiction over purely State qualifying facilities. One is that the FPA only concerns regulations of “sales” and therefore, only the “seller”. Thus, it is reasoned that the PSC’s attempt to regulate a utility’s purchase rate is merely a permissible regulation of the “purchaser”, which Congress intended to leave to the States. The second is that the energy produced by a local State qualifying facility and purchased by a State utility is admittedly a sale for resale to the utility’s New York State consumers but it is not in interstate commerce because the energy originates and remains within the State.

As to the permissible-“purchaser”-regulation argument, there is no doubt that this State has long regulated utilities (see Public Service Law, § 110, subd 4; § 66, subd 12)

and that such regulation is “one of the most important of the functions traditionally associated with the police power of the States.” (see Arkansas Elec. Coop. v Arkansas Public Serv. Comm., 461 US 375 , 377, supra.) Equally clear is the fact that the FPA did leave much regulation of utilities to the States and that Congress did not want to interfere with States’ rights in this area (see 16 USC § 824 [a] [“such Federal regulation, however, to extend only to those matters which are not subject to regulation by the States.”]; § 824 [b] [FPA “shall not apply to any other sale of electric energy”]). While facially appealing,^[12] the argument distinguishing the admittedly preempted regulation of sellers of wholesale electricity (on-site generators) from purchasers in the same transactions (the utilities) is, upon closer examination, untenable. Such a distinction would simply achieve indirectly that which is not permitted directly (see Northern Gas Co. v Kansas Comm., 372 US 84 , 91-93). In Northern Gas Co., a State’s attempt to require interstate pipeline companies to purchase gas ratably from local, State wells was rejected as an indirect attempt to impermissibly regulate wholesale prices of natural gas in interstate commerce, which could “seriously impair” FERC’s ability to regulate in the field.^[13]

The PSC’s second argument is readily disposed of. An analysis under the FPA of whether a wholesale sale of electricity from an on-site generator to a utility is purely intrastate turns on scientific evidence regarding whether any of the electricity involved originates or is consumed outside the State (see FPC v Florida Power & Light Co., 404 US 453 , 454-455 [FERC jurisdiction upheld on basis of scientific and technical evidence that was used to determine that electrons from a Florida utility eventually flowed into Georgia because of “commingling” of electrons at the point of interconnection with Georgia utility lines]).

It may be, as the PSC contends, that sales by the purely State qualifying facilities to petitioner remain in

trastate; indeed, petitioner ^admits that some may be.^[14] However, this basis for State regulation, which requires scientific evidence regarding the flow of electricity, was not relied upon by the PSC in its decision. “A fundamental principle of administrative law long accepted by this court limits judicial review of an administrative determination solely to the grounds invoked by the agency, and if those grounds are insufficient or improper, the court is powerless to sanction the determination by substituting what it deems a more appropriate or proper basis” (Matter of Trump-Equitable Fifth Ave. Co. v Gliedman, 57 NY2d 588 , 593 [citations omitted]). The sole ground relied upon by the PSC, permissible regulation of purchases of wholesale electricity in interstate commerce, is erroneous, and thus, the PSC’s assertion of jurisdiction over purely State qualifying facilities is preempted by the FPA.

Accordingly, the judgment of the Appellate Division should be modified by reinstating the determination of the Public Service Commission insofar as it permits imposition on utilities of a minimum purchase rate of 6 cents per kilowatt hour for electricity generated by Federal qualifying facilities which also qualify under the Public Service Law and, as so modified, affirmed.

Judges Jones, Wachtler, Meyer, Simons and Kaye concur; Judge Jasen taking no part.

Judgment modified, with costs, to appellant, in accordance with the opinion herein and, as so modified, affirmed.