A complaint filed on Jan. 21, 2014, in the Massachusetts Federal District Court by a diverse group of plaintiffs has implications for how far state utility regulators can go in approving merger settlements and, more importantly, what role such proceedings should have in fostering a governor’s energy policies.
The town of Barnstable, Mass., along with various corporate and individual plaintiffs, filed suit seeking declaratory and injunctive relief against various sitting members of the Massachusetts Department of Public Utilities and the Massachusetts Department of Energy Resources in connection with a contract to purchase a portion of the electrical output from Cape Wind, a proposed offshore wind project.
Cape Wind is a proposed “offshore” wind facility located in Nantucket Sound that involves 130 wind turbines to be constructed across 25 square miles. Like most electric generators, Cape Wind has been attempting for a number of years to sell its electric output to utility purchasers. Massachusetts Gov. Deval Patrick has been a long-standing supporter of the Cape Wind project, largely for the anticipated economic boost the project is likely to create for the commonwealth of Massachusetts.
In 2010, Cape Wind achieved some initial success selling the proposed project’s output when it entered into a long-term (initially 15 years) contract with National Grid, the local electric public utility. This power purchase agreement (PPA) contains first-year pricing of 18.7 cents per kilowatt hour, increasing at 3.5 percent each year.
Under the PPA with National Grid, Cape Wind is providing about 234 megawatts annually, which represents about 50 percent of the Cape Wind project’s total output. National Grid was motivated to enter into the PPA with Cape Wind because of Massachusetts’ Green Communities Act, which required electric utilities in the state to purchase up to 3 percent of their electricity requirements from renewable energy generators located in that state.
While National Grid was willing to enter into a PPA with Cape Wind without first soliciting competing bids from other potential renewable energy suppliers, NSTAR, a Massachusetts electric utility, was unwilling to do so. Instead, NSTAR sought to implement its renewable energy purchase obligations under Massachusetts’ Green Communities Act by issuing in 2010 a Request for Proposals for Long-Term Contracts for Renewable Energy Projects.
After the Massachusetts Green Communities Act was amended to allow utilities to purchase from out-of-state renewable energy projects, NSTAR completed the RFP and, according to the federal complaint, awarded long-term agreements to three land-based wind generators at prices about 50 percent lower than what National Grid agreed to pay Cape Wind.
Against this backdrop, in November 2010, NSTAR and Northeast Utilities (another Massachusetts utility) filed an application with the Massachusetts DPU to merge. Cape Wind successfully intervened in the merger proceeding. As alleged by the plaintiffs, the DOER, “an arm of the Patrick administration” and an intervenor in the merger case, sought to use the merger proceeding to extract from NSTAR a commitment to enter into a PPA with Cape Wind, despite the results of NSTAR’s RFP process.
The plaintiffs further allege that DOER coerced the PPA from NSTAR by:
(1) requesting that the DPU modify its standard of review of the proposed merger to make it more difficult to satisfy the appropriate legal standards (which moved from a neutral or no-worse-off test to “substantial net benefit to the public interest”);
(2) filing a request that the DPU stay or delay the merger proceeding to determine its effect on consumers’ rates; and
(3) filing a request (seconded separately by Cape Wind) that the DPU, as a condition of approving the merger, require NSTAR to purchase wind energy.
While NSTAR opposed these various DOER efforts, it was presented with the difficult choice of entering into what it believed to be an excessively priced PPA with Cape Wind or risking its ability to timely obtain approval of the merger. Ultimately, NSTAR elected to enter into a settlement agreement with DOER in February 2012 under which (1) NSTAR agreed to execute a long-term PPA with Cape Wind and (2) DOER agreed to fully support the merger.
In accordance with the merger settlement agreement, NSTAR and Cape Wind entered into a PPA in March 2012 with pricing that was identical to the pricing in the previously negotiated PPA with National Grid. The NSTAR/Northeast Utilities merger was approved by the DPU in April 2012.
NSTAR filed a petition with the DPU to approve its PPA with Cape Wind in March 2012 and that petition was approved by the DPU in November 2012. According to the plaintiffs in the federal complaint, the pricing in the PPA between NSTAR and Cape Wind was more expensive than the other projects NSTAR had identified to meet its purchase obligations under the Massachusetts Green Communities Act.
In this federal complaint, the plaintiffs are seeking a determination, among other things, that the DOER, in conditioning its support for the NSTAR/Northeast Utilities merger on the execution of a wholesale electricity agreement with Cape Wind, intruded upon the Federal Energy Regulatory Commission’s exclusive jurisdiction over wholesale electric rates under the Federal Power Act, which has the effect of preempting state law over such matters.
Secondly, the plaintiffs contend that by conditioning its approval of the merger on the execution of a PPA between NSTAR and Cape Wind, the DOER prevented out-of-state renewable facilities from competing with Cape Wind in violation of the Commerce Clause of the United States Constitution.
While we have yet to hear from Cape Wind, DOER and the DPU on the merits of this recently filed federal complaint, some critical issues have already emerged:
1. Is this federal lawsuit essentially a form of collateral attack against the DPU’s approval of the merger and the later-filed PPA, both of which should have been appealed through the established appeal process in Massachusetts?
2. Was the FERC given an opportunity to address the justness and reasonableness of the wholesale electric rates contained in the Cape Wind-NSTAR power purchase agreement under the Federal Power Act? If not, why not?
3. To the extent the federal complaint is challenging the recovery in customer rates of the allegedly excessive costs under the Cape Wind-NSTAR power purchase agreement, is this relief barred by the Johnson Act (i.e., federal legislation that generally prohibits federal district courts from enjoining, suspending or restraining the operation of, or compliance with, any order affecting rates chargeable by a public utility and made by a state administrative agency or a rate-making body of a state political subdivision)?
The federal complaint essentially challenges the DPU’s authority to approve a merger settlement that contains “conditions” that are considered to be outside of the regulatory authority’s jurisdiction, in this case, the condition that NSTAR and Cape Wind enter into a PPA involving wholesale electric rates traditionally regulated by FERC.
Some states, like Pennsylvania, draw a distinction between extra-jurisdictional merger conditions that are:
(1) voluntarily entered into by the merger participants (which are considered enforceable by the state utility commission) and
(2) those directly imposed by the state utility commission (which are generally considered to be unenforceable).
The interesting twist raised by the federal complaint in this case are the allegations suggesting that the supposedly “voluntary” merger condition (i.e., NSTAR’s willingness to enter into a long-term PPA with Cape Wind) approved by the DPU was effectively coerced by DOER, to accomplish political goals.
This is the first round and we have yet to see the responses from the DPU, DOER, NSTAR and Cape Wind to the federal complaint. Stay tuned. We certainly will.
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