63 N.Y.2d 424 (1984)

A state can require electric utilities to purchase power from qualifying alternative energy facilities at rates exceeding the federal maximum under the Public Utility Regulatory Policies Act (PURPA), but the Federal Power Act (FPA) preempts state regulation of purely state-qualifying facilities.

Summary

Consolidated Edison (Con Ed) challenged a New York Public Service Commission (PSC) determination requiring them to purchase power from on-site generation facilities at a minimum rate of 6 cents per kilowatt-hour for state-qualifying facilities, arguing federal preemption. The Court of Appeals held that PURPA does not preempt state regulations setting higher rates for federally qualifying facilities. However, the FPA does preempt state regulation of purchases from facilities that qualify only under state law, because these sales are considered wholesale sales in interstate commerce subject to FERC’s exclusive jurisdiction. The state’s interest in encouraging alternative energy sources does not outweigh federal authority over interstate energy sales.

Facts

In response to the energy crisis, Congress enacted PURPA to encourage alternative energy development. New York State passed a similar law (Public Service Law § 66-c) mandating utilities to purchase power from state-qualifying facilities, setting a minimum purchase price of 6 cents per kilowatt-hour. The PSC determined that Con Ed must purchase power from facilities qualifying under either federal or state law, with the 6-cent minimum for state facilities and an avoided-cost rate for purely federal facilities.

Procedural History

Con Ed initiated an Article 78 proceeding challenging the PSC’s determination based on federal preemption. The Appellate Division granted the petition in part, concluding that the FPA and PURPA preempted the field, giving FERC exclusive jurisdiction. The Appellate Division modified the PSC determination, limiting mandatory purchases to federally qualifying facilities and invalidating the 6-cent minimum rate where it conflicted with the federal avoided-cost mandate. The PSC appealed to the New York Court of Appeals.

Issue(s)

1. Whether PURPA preempts state regulation requiring electric utilities to purchase power from federal qualifying facilities at a rate exceeding the avoided cost purchase rate required under PURPA?

2. Whether Part II of the Federal Power Act (FPA) preempts the PSC from compelling utilities to offer to purchase power from facilities that qualify only under the Public Service Law?

Holding

1. No, because the language and legislative history of PURPA indicate that the avoided-cost rate is a maximum only in the context of the federal government’s role and allows states to separately encourage alternative power production by imposing higher rates for federally qualifying facilities.

2. Yes, because the FPA grants FERC exclusive regulatory authority over wholesale sales of electricity in interstate commerce, and state attempts to regulate purchases from purely state-qualifying facilities indirectly regulate wholesale prices, infringing on FERC’s jurisdiction.

Court’s Reasoning

Regarding the first issue, the court reasoned that preemption analysis starts with the assumption that Congress did not intend to prohibit state action, especially in areas historically regulated under state police power, such as local electric utilities. The court found no direct conflict between PURPA’s maximum purchase rate and the state law’s higher minimum because PURPA’s avoided-cost rate was intended as a ceiling only for federal regulations, leaving room for states to encourage alternative power production with higher rates. Quoting the Joint Explanatory Statement of the Committee of Conference on PURPA, the court noted that the federal regulation was “meant to act as an upper limit on the price at which utilities can be required under this section to purchase electric energy.” The court also deferred to FERC’s interpretation that independent, complimentary state regulation was permissible. The court rejected Con Ed’s argument that the state law thwarted PURPA’s objective of avoiding consumer ratepayer subsidies, stating that this objective was merely one factor FERC considered and that PURPA’s primary purpose was to encourage alternative energy development, even if it meant higher rates in the short run.

Regarding the second issue, the court held that the FPA preempts state regulation of purely state-qualifying facilities. The FPA applies to the sale of electric energy at wholesale in interstate commerce, and the court determined that the PSC’s attempt to regulate a utility’s purchase rate was an impermissible regulation of the “purchaser” which Congress intended to leave to the States. Citing Northern Gas Co. v. Kansas Comm., the court stated that such a distinction would simply achieve indirectly that which is not permitted directly. The court also rejected the PSC’s argument that the energy produced by a local state-qualifying facility and purchased by a state utility was not in interstate commerce because the energy originated and remained within the state, noting that this required scientific evidence regarding the flow of electricity which was not relied upon by the PSC in its decision. The court emphasized the importance of limiting judicial review of administrative determinations to the grounds invoked by the agency, quoting Matter of Trump-Equitable Fifth Ave. Co. v. Gliedman. Since the sole ground relied upon by the PSC was erroneous, the court found the PSC’s assertion of jurisdiction over purely state-qualifying facilities to be preempted by the FPA.