Petition — Aluminum Co. of America v. Utilities Commission of North Carolina
Supreme Court brief1984
Ask Donna
What actually matters in this document.
Text
Office - Supreme Court, US
83-992 FILED,
No. ___ DEC 16 1983
ALEXANDER Lt. RE
IN THE Sossun
Supreme Court of the United States
OCTOBER TERM, 1983
>_>
ALUMINUM COMPANY OF AMERICA and
TAPOCO, INC.,
Petitioners,
—vV _—
UTILITIES COMMISSION OF THE STATE
OF NORTH CAROLINA, ef al.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE FOURTH CIRCUIT
RONALD D. JONES*
GRANT S. LEWIS
DAVID R. POE
JOHN S. KINZEY
LEBOEUF, LAMB, LEIBY & MACRAE
520 Madison Avenue
New York, New York 10022
(212) 715-8000
RICHARD L. HOLZ
1501 Alcoa Building
Pittsburgh, Pennsylvania 15219
(412) 553-4345
*Counsel of Record
QUESTIONS PRESENTED
1. Did the Court of Appeals incorrectly extend the “absten-
tion” doctrine articulated by cases such as Younger v. Harris,
401 U.S. 37 (1971), and Burford v. Sun Oil Co., 319 U.S. 315
(1943), when it affirmed the dismissal of petitioners’ complaint
alleging that a state utility commission had contravened both
the Commerce Clause and the preemptive federal regulatory
scheme of the Federal Power Act by attempting to give local
consumers “first call” on inexpensive hydroelectric power sold
in interstate commerce?
2. Should the Court grant this petition for a writ of cer-
tiorari to resolve the conflict between the Fourth Circuit’s
decision in this case, and the recent decisions of the Third
Circuit (in a case in which this Court has noted probable
jurisdiction), and of the Second and Ninth Circuits, that the
doctrine of abstention may not properly be invoked when a
federal plaintiff alleges that a state agency or official has
violated a preemptive federal statutory scheme?
3. Assuming arguendo that the abstention doctrine may
properly be invoked in a case in which a plaintiff asserts claims
based on federal statutory preemption, did the Court of
Appeals adopt an erroneous legal standard for determining
whether abstention was appropriate, when it failed to balance
the competing interests of the federal and state governments in
the resolution of petitioners’ preemption claims, and instead
affirmed the dismissal of petitionérs’ complaint solely on the
ground that the District Court could not adjudicate petitioners’
preemption claims without deciding disputed questions of fact?
eS a ee ns iden
PARTIES TO THE PROCEEDING
In addition to the parties named in the caption, Robert K.
Koger, Leigh H. Hammond, Sara Lindsay Tate, John W.
Winters, Edward B. Hipp, A. Hartwell Campbell! and Douglas
P. Leary (who were made parties in their respective official
capacities as chairman and commissioners of the North Caro-
lina Utilities Commission), the State of Tennessee, and the
Tennessee Office of Community and Economic Development
are respondents. Rufus L. Edmisten, who is the Attorney
General of North Carolina, and the United Steelworkers of
America, AFL-CIO, and its Local Union 309, submitted briefs
as amicus curiae in the Court of Appeals.
STATEMENT PURSUANT TO RULE 28.1
Petitioner Tapoco, Inc. is a wholly-owned subsidiary of
petitioner Aluminum Company of America.
see
TABLE OF CONTENTS
PAGE
RFR E eee PUBMED oe 0 0 5.0.0 chun seals deasaes i
PARTIES TO THE PROCEEDING ............-.00- ii
STATEMENT PURSUANT TO RULE 28.1 .......... ii
Ie PAGS PPE EOE os on visors vcccdievnwesvene v
EE << cess 4's. a FEC AR RNAS ae Romeo Tae i
ee no ee ace paths cece ea beess 0} de 1
STATUTORY PROVISIONS INVOLVED ............ 2
STATEMENT OF THE CASE... wc ccscccecccccccces 2
Fis. Wee Pee GE TD CARB oi av ciiceccevecevesde 2
i oa nas Ses Gheguieeccum cence 3
Cis, OE SINE. cs pose babys cetebecedeukie 7
REASONS FOR GRANTING THE PETITION....... 9
This Court Should Address The Important Questions
of Whether, and in What Circumstances, the Federal
Courts Should Abstain From Adjudicating Allega-
tions That A State Has Contravened A Preemptive
Federal Statutory Scheme .......ccccccsccvccveses 9
Point I. This Court Should Consider The Important
Question, Which Has Divided The Circuit Courts, Of
Whether Abstention Is Ever Appropriate When A
Federal Plaintiff Alleges That A State Agency Has
Violated A Preemptive Federal Statutory Scheme.... 10
A. The Considerations Of Comity And Federalism
Which Are The Basis For The Abstention Doc-
trine Are Never Served By Dismissing Federal
POE SE: ys 6 id ein cee ene rasede ees
B. The Fact That Federal Law Provides The Rule of
Decision In Preemption Cases Is A Further Rea-
son Why Absention Is Not Appropriate.........
C. The History And Evolution Of The Abstention
Doctrine Demonstrate That The Doctrine Was
Not Intended To Bar Adjudication Of Claims
Based On Federal Statutory Preemption ........
D. The Court Should Resolve The Conflict Between
The Circuits As To Whether The Federal Courts
Should Abstain In Preemption Cases...........
Point II. Assuming That Abstention May In Some
Circumstances Be Proper In A Preemption Case, This
Court Should Decide The Important Issue Of Whether
The Court of Appeals Established The Correct Legal
Standard For Determining When Abstention Is
PAE AP PO EE Te wy ee SSE
IDES Cusp pcica eda buwe ai s4.eOnn rel eee aaa
SE ok dvd inves ccwakeews ekieae dbs las mak
Ms bh vss s Gachhdabonbadats ab inaseean”
ES ns ssc a Oba ds oie Ce ba Da She CON Cay ReeeEn
I OE Ke vido bv nsw dk vckvbiwacaethsbakaconern
PET Die pl oad ubdbcccencsecsss ded eusythugaeds
PAGE
10
13
15
19
J
TABLE OF AUTHORITIES
A. Cases PAGE
Alabama PS.C. v. Southern R. Co., 341 U.S. 341
ee cere es ok ds VudtittGa ene bene 16, 17n
Baggett v. Dept. of Professional Regulation, 717 F.2d
EL ENG. wioec sa chbaaes eee Saaka 13, 19n, 22n
Burford v. Sun Oil Co., 319 U.S. 315 (1943). ......... 10-12,
14, 16, 17
Capital Service, Inc. v. N.L.R.B., 347 U.S. 501 (1954) 17, 20
Chemical Specialties Mfrs. Ass’n v. Lowery, 452 F.2d
a he ko Lae eeeae aee 20n, 22n
Colorado River Conservation District v. United States,
Oe Ee ee 10, 11, 14, 23-25
Edgar v. MITE Corp., 457 U.S. 624 (1982)..........+. 20
England v. Bd. of Medical Examiners, 375 U.S. 411
EE. Mic a ok on se ed eh baa eee owahnenaes l!n
Ex Parte Young, 209 U.S. 123 (1908) ..............5. 15, 18
Fair Assessment in Real Estate Ass’n v. McNary, 454
re. ee eh seep keen ha dune’ 9n
F-E.R.C. v. Mississippi, 456 U.S. 742 (1982).......... 2
EPC. v. Southern California Edison Co., 376 U.S. 205
CEL. ai eeea Tne ws bad mae aweebes Peake nade 5n, 8n
First lowa Hydroelectric Cooperative v. F. P-C., 328 U.S.
SS ts Wi GO: on ude sce kea oer enbarckqeGkued 3n
Hagans v. Lavine, 415 U.S. 528 (1974). .............. 14
Harmon vy. Forssenius, 380 U.S. 528 (1965)........... lin
Hotel & Res. Emp. & Bar. Int. Union 54 v. Danziger, 709
F.2d 815 (3rd Circuit), probable jurisdiction noted,
sub nom. Brown v. Hotel & Res. etc., __._ U.S. ___
(Case Nos. 83-498 and 83-573, Nov. 28, 1983)....... 9, 12,
vi
PAGE
Huffman v. Pursue, Ltd., 420 U.S. 592 (1975) ........ 11, 14
L.B.E.W. v. PS.C., 614 F.2d 206 (9th Cir. 1980) ....... 12, 24
Jones v Rath Packing Co., 430 U.S. 519 (1977) ....... 20
Juidice v. Vail, 430 U.S. 327 (1977)... ... cece eeeeeees 15
Kennecott Corp. v. Smith, 637 F.2d 181 (3rd Cir. 1980) 13
Knudsen Corp. v. Nevada State Dairy Comm., 676 F.2d
nh 2. 7s Lesley i bee beens 6s 12, 19
Lemon v. Kurtzman, 403 U.S. 602 (1971) ........645- 22
Middlesex County Ethics Committee v. Garden State
Se RE is ST Wide GRD CIDER) sec cccdscevvvcccces 2, 23
Moore v. Sims, 442 U.S. 415 (1979) ..........0e eens 9n, lin
Moses H. Cone Memorial Hosp. v. Mercury Const.
oC |< ee Fe ey.) ee 2, 23, 24
Narragansett Electric Co. v. Burke, 381 A.2d 135 (S.Ct.
R.I. 1977), cert. denied, 435 U.S. 972 (1978)........ 8n
New England Power Co. v. New Hampshire, 455 U.S.
IOS cibiy's'c he cic 6.0 000s 06 Uaws¥iniceve Si mah 2
Northern Natural Gas Co. v. 8.C.C. of Kansas, 372
OSE, us canst piensa hit noes h Mm Gee ap 14
O’Brien v. Skinner, 414 U.S. 524 (1974). ...... 000000 14
PU.C. v. Attleboro Steam & Electric Co., 273 U.S. 83
CS co Ce Usd kw daws 64 Mecha hhe 6 ewe Reb ehie Sn
PU.C. v. United Fuel Gas Co., 317 U.S. 456 (1943) ..16, 17n
Railroad Comm’n vy. Pullman Co., 312 U.S. 496
cr ar re ee ee 10, lin
State ex rel. Utilities Commission v. Edmisten, 299 N.C.
G52, BOs G.. Be SED CIDE oo civdeccckwededvvedeves 6
Steffel v. Thompson, 415 U.S. 452 (1974) .........55. 14
Vii
PAGE
Stone & Webster Engineering Corp. v. Ilslely, 690 F.2d
323 (2nd Cir. 1982), aff’d, 103 S.Ct. 3564 (1983)..... 18-20
Swift & Co. v. Wickham, 382 U.S. 111 (1965)..... 15, 16, 18
eee DU. BOW ClP Ieee vec ceedachacennun 3n
Trainor v. Hernandez, 431 U.S. 434 (1977) ........... 12, 13
United Mine Workers v. Gibbs, 383 U.S. 715 (1966) ... 14
Younger v. Harris, 401 U.S. 37 (1971) ..........0005. 2, 10
13, 17, 18
B. Statutes
Federal Power Act
ee Ms Fn OF OOD cc rccccscccccvcésare 3
Re Sn ea ge Serer rrr ers 5
Johnson Act of 1934
POE cedasiecsencedeyessnewens acne 7, 15, 16
Judicial Code
IEE BED Re ss vinsvesccsecnccetvsn dss bos 6Gah 7
a Dre ere 7
rd MEER Ao ac Sheeees sedededscvebon Caw 2
diss Oe COMO icc e vececcassbesevecets 15, 16
Tennessee Valley Authority Act of 1933
section 260, 16 U.S.C.8 S3lyek.... cccccccccccccses 4
IN THE
Supreme Court of the United States
OCTOBER TERM, 1983
4 Pe
—_
ALUMINUM COMPANY OF AMERICA and
TAPOCO, INC.,
Petitioners,
—V.—
UTILITIES COMMISSION OF THE STATE
OF NORTH CAROLINA, et al.,
Respondents.
<>
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE FOURTH CIRCUIT
Aluminum Company of America (“Alcoa”) and Tapoco,
Inc. (“Tapoco”) petition for a writ of certiorari to review the
judgment of the United States Court of Appeals for the Fourth
Circuit in this case.
OPINIONS BELOW
The opinion of the Court of Appeals (Appendix A, infra,
la-12a) is reported at 713 F.2d 1024. The opinion of the
District Court (Appendix D, infra, 17a-30a) is not reported.
JURISDICTION
The judgment of the Court of Appeals (Appendix B, infra,
13a-14a) was entered on July 28, 1983. A timely petition for
rehearing was denied on September 21, 1983. (Appendix C,
infra, 1Sa-16a) The jurisdiction of this Court is invoked pur-
suant to 28 U.S.C. § 1254(1).
STATUTORY PROVISIONS INVOLVED,
This case does not involve the construction or application of
any constitutional or statutory provisions.
STATEMENT OF THE CASE
A. The Nature Of The Case
In recent years, this Court has taken a number of opportuni-
ties to consider the proper relationship of the federal courts to
the state courts. The Court’s decisions have created an evolv-
ing “abstention” doctrine, which counsels the federal courts
against interfering unnecessarily with proceedings in the state
courts that concern matters primarily of local concern. See,
e.g., Younger v. Harris, 401 U.S. 37 (1971); Middlesex County
Ethics Committee v. Garden State Bar Ass’n, 457 U.S. 423
(1982). Cf. Moses H. Cone Memorial Hosp. v. Mercury Const.
Corp., ___. U.S. ___., 103 S.Ct. 927 (1983).
While the Court has recognized the importance of deferring
to the state courts when important state interests are involved,
the Court’s recent decisions have also strongly reaffirmed the
supremacy of federal substantive law in areas which, under the
Constitution, are matters of federal concern. In particular, this
Court has recently invalidated, as repugnant to the Commerce
Clause, a state’s efforts to give its own citizens preferential
access to electric power generated within the state’s borders,
New England Power Co. v. New Hampshire, 455 U.S. 331
(1982), and the Court has unambiguously upheld the power of
Congress, acting pursuant to the Commerce Clause, to enact
statutes preempting state regulation of the generation and sale
of electricity in interstate commerce. FE.R.C. v. Mississippi,
456 U.S. 742 (1982).
In this case, the important policy considerations underlying
these two lines of precedent have needlessly come into conflict.
As will be described below, the controversy arose when re-
spondent North Carolina Utilities Commission (“NCUC”)
adopted an administrative order which had the stated purpose
of giving North Carolina residents “first call” on the low-cost
3
hydroelectric power generated by Tapoco at its dams in North
Carolina and Tennessee, thereby depriving Aicoa and the State
of Tennessee of the benefits of this scarce natural resource.
Alcoa and Tapoco brought suit in the District Court to enjoin
the enforcement of the NCUC’s order, alleging that the order
impermissibly burdened interstate commerce and conflicted
with the preemptive statutory scheme of the Federal Power
Act. Although petitioners’ lawsuit only raised questions of
federal law, the Court of Appeals held that the federal courts
should abstain from adjudicating their claims. It accordingly
affirmed the dismissal of petitioners’ complaint, forcing Alcoa
and Tapoco to litigate their federal claims in the state courts.
B. Underlying Facts
Alcoa operates an aluminum smelting operation in Blount
County, Tennessee (hereinafter, Alcoa’s “Tennessee Opera-
tions”). Alcoa’s subsidiary, Tapoco, supplies electric power to
Tennessee Operations. Tapoco operates four hydroelectric
generating stations in North Carolina and Tennessee. Tapoco’s
hydroelectric stations have been duly licensed by the Federal
Energy Regulatory Commission (“FERC”) (formerly the Fed-
eral Power Commission), the federal agency with exclusive
jurisdiction under Part I of the Federal Power Act, 16 U.S.C.
§ 791 et seqg., to approve the construction of dams on naviga-
ble waters within the United States.'
Another Alcoa subsidiary is Nantahala Power & Light Com-
pany (“Nantahala”). Like Tapoco, Nantahala operates a num-
ber of federally licensed hydroelectric projects. However,
unlike Tapoco, Nantahala operates as a public utility, serving
six counties in western North Carolina. Since 1971, Alcoa’s
Tennessee Operations has purchased no electric power from
Nantahala, and Nantahala’s hydroelectric facilities, con-
1 See, First lowa Hydroelectric Cooperative v. F P-C., 328 U.S. 152
(1946). Tapoco’s federal license for its hydroelectric projects recognizes that
all hydroelectric power generated by Tapoco will be used to supply Alcoa’s
Tennessee Operations. Tapoco, Inc., 14 F.P.C. 610, 612-13 (1955).
4
structed with capital provided by Alcoa, have been totally
dedicated to serving Nantahala’s public utility customers.’
Because the dams owned by Tapoco and Nantahala are
located on the watershed of the Little Tennessee River, Section
26a of the Tennessee Valley Authority Act of 1933, 16 U.S.C.
§ 83ly-1, required that the Board of Directors of the Tennessee
Valley Authority (“TVA”) approve the way in which the dams
were operated and maintained. In compliance with this re-
quirement, Alcoa,.on behalf of itself and its subsidiaries,
entered into an agreement with TVA known as the “Fontana
Agreement of 1941,” which was essentially superseded in 1963
by a “New” Fontana Agreement. These agreements gave TVA
the right ‘o control the discharge of water at the Alcoa
subsidiaries’ dams, which allowed TVA to coordinate the
operation of those dams with its own facilities. The agreements
also provided that all electric.power generated at the dams
owned by Nantahala and Tapoco would be delivered to TVA,
to be dispatched by TVA over its interstate transmission grid.
In return, TVA agreed in the New Fontana Agreement to
provide the Alcoa subsidiaries with fixed “entitlements” of
electric energy, regardless of the amount of energy which
Tapoco and Nantahala actually delivered to TVA. The “entitle-
ments” of energy from TVA were divided between Tapoco and
Nantahala pursuant to an “Apportionment Agreement” which
those two companies executed in 1971.
By the late 1970’s the “entitlements” of energy which
Tapoco and Nantahala received from TVA came to be of great
2 ‘Prior to 1971, when Nantahala’s service area was more sparsely
populated than it is today, Alcoa’s Tennessee Operations acted as a “cus-
tomer of last resort” for Nantahala by purchasing any power which was not
necessary to serve Nantahala’s public utility customers. These purchases
helped to defray Nantahala’s costs of providing service. By supplying the
capital necessary to construct Nantahala’s hydroelectric facilities, and then
helping to amortize these investment costs by purchasing Nantahala’s excess
power for Tennessee Operations, Alcoa conferred a significant economic
benefit on Nantahala’s customers who, as the direct result of Nantahala’s
present ability to generate low-cost hydroelectric power, enjoy one of the
lowest rates for electric service in the nation.
5
economic value, because the hydroelectric generating costs
associated with these entitlements were significantly lower than
the costs of generating power by any alternative means. Under
the two agreements, Tapoco did not receive enough power as
“entitlements” to satisfy fully the demand of Alcoa’s Tennes-
see Operations, nor did Nantahala receive enough power to
serve all of its customers’ needs. Both Alcoa and Nantahala
therefore had to purchase relatively expensive supplemental
power from TVA.
The New Fontana and Apportionment Agreements were
agreements for the sale of electric power at wholesale in
interstate commerce, and the FERC therefore had exclusive
jurisdiction under Part II of the Federal Power Act, 16 U.S.C.
§ 824 ef seq., to determine whether the terms of those agree-
ments were just and reasonable.’ The reasonableness of the
two agreements was fully considered by the FERC, in a
proceeding in which the Attorney General of North Carolina
participated as the representative of the ratepaying public of
North Carolina. Nantahala Power & Light Co., FERC Docket
No. ER76-828. After hearing, the FERC corrected certain
minor inequities allegedly resulting from the Apportionment
Agreement, but otherwise found the two Agreements to be fair
and reasonable.‘
Although the NCUC has been preempted by the Commerce
Clause and the Federal Power Act from adjudicating the
3 Part II of the Federal Power Act was enacted to fill the regulatory
gap created by this Court’s decision in RU.C. v. Attleboro Steam & Electric
Co., 273 U.S. 83 (1927), which held that Commerce Clause prohibited the
states from regulating interstate wholesale transactions in electric power. In
enacting Part II of the Federal Power Act, “Congress meant to draw a bright
line easily ascertained, between state and federal jurisdiction. . . . This was
doné in the Power Act by making [FERC] jurisdiction plenary and extending
it to all wholesale sales in interstate commerce except those which Congress
has made explicitly subject to regulation by the states.” FRC. v. Southern
California Edison Co., 376 U.S. 205, 215-16 (1964).
4 Nantahala, the North Carolina Attorney General, and other in-
terested parties have appealcd the FERC’s decision to the Fourth Circuit.
Nantahala Power & Light Co. v. FE.R.C., Case No. 82-1872, and related
cases.
6
reasonableness of the New Fontana and Apportionment Agree-
ments, it has jurisdiction to regulate Nantahala’s rates to its
local retail customers. Prior to the order which precipitated
this litigation, the NCUC had always accepted the costs and
allocations of power established by Nantahala’s federally regu-
lated agreements as binding on the NCUC when it established
Nantahala’s retail rates. However, in 1980, the Supreme Court
of North Carolina reversed the NCUC’s decision in a Nanta-
hala rate case, with instructions that the NCUC determine on
remand whether a different methodology would be “in the best
interest of the [North Carolinian] customers of Nantahala.”
State ex rel. Utilities Commission v. Edmisten, 299 N.C. 432,
434, 263 S.E.2d 583, 586 (1980).
On remand, a panel of the NCUC, composed of respondents
Tate, Campbell and Leary, entered an Order Reducing Rates
and Requiring Refunds, dated September 2, 1981. Relevant
portions of this order are submitted as Appendix E to this
petition. (31a-74a). In its order, the NCUC panel arrogated to
itself the FERC’s exclusive jurisdiction to determine the rea-
sonableness of the New Fontana and Apportionment Agree-
ments, and purported to find that those agreements contained
“a number of inequities” to Nantahala and “concealed bene-
fits” to Alcoa. (37a). The NCUC rejected the ratemaking
methodology proposed by Nantahala because that method was
“based in all material respects upon demand and energy
entitlements as described and set forth in the [federally regu-
lated] New Fontana Agreement and the Tapoco-Nantahala
Apportionment Agreement.” /d. In place of a methodology
based on Nantahala’s FERC-regulated agreements, the NCUC
panel substituted its own method which was “based in all
material respects on the assumption” that Nantahala’s cus-
tomers had “first call on the total electric energy output” of
both Nantahala and Tapoco. Jd. The NCUC panel conceded
that its order had the economic effect of reforming the parties’
federally regulated agreements, stating that its ratemaking
methodology “avoids the need for complete identification of
inequities and is nicely suited as a proper alternative to refor-
mation of contracts.” (56a).
7
After this litigation was commenced in the District Court,
the full NCUC affirmed the panel’s order. The NCUC ordered
Nantahala to make refunds in excess of $18 million, and held
Alcoa liable for these refunds to the extent that Nantahala was
financially unable to pay them. Because Nantahala lacks the
resources to pay more than a small fraction of the refunds,
most, if not all, of the refund obligation the NCUC has
imposed will be borne by Alcoa.
C. Proceedings Below
On January 26, 1982, Alcoa and Tapoco brought suit against
the NCUC and its members in the District Court.’ Their
complaint alleged, inter alia, that the NCUC’s orders placed an
impermissible burden on interstate commerce and conflicted
with the preemptive authority of the FERC under the Federal
Power Act.
Defendants moved to dismiss the complaint. Alcoa and
Tapoco moved for summary judgment, taking the position that
it was clear from the face of the NCUC’s orders that the
NCUC was improperly attempting to give Nantahala’s cus-
tomers “first call” on Tapoco’s hydroelectric power in con-
travention of the preemptive federal regulatory scheme.
On July 29, 1982, the District Court, Honorable Franklin T.
Dupree, Jr., ruled on the outstanding motions. The District
Court held that it had subject matter jurisdiction under 28
U.S.C. §§ 1331 and 1337. It further held that the Johnson Act,
28 U.S.C. § 1342, which in certain enumerated instances pre-
vents the federal courts from enjoining the enforcement of
state ratemaking orders, did not apply. See p. 16, infra.
However, relying principally on the Burford and Younger
abstention doctrines, more fully discussed infra, the District
Court ruled that it must abstain from exercising its jurisdic-
tion, because ‘‘[cJonsideration of the federal [preemption]
questions . . . would require detailed factfinding concerning
5 The action was originally brought in the Eastern District of Tennes-
see but was transferred by that court, on defendants’ motion, to the Eastern
District of North Carolina. See 548 F. Supp. 18.
8
the indirect effects of the NCUC rate and refund orders on ,
interstate commerce, on the rates established by the FERC,
and on contracts filed with the FERC.’’ (29a). It therefore
dismissed the complaint, leaving Alcoa and Tapoco no option
other than to pursue their federal claims in the North Carolina
state courts.°
On appeal, the United States Court of Appeals for the
Fourth Circuit, per Honorable Sam J. Ervin, Ill, affirmed
both the District Court’s holding that it had jurisdiction, and
its holding that it should abstain from exercising that jurisdic-
tion. The Court of Appeals ‘‘decline[d] to adopt . . . a per se
rule’ that ‘‘abstention is never appropriate where the federal
plaintiff asserts a preemption claim.’’ (12a). The court ac-
cepted, without analysis, the District Court’s finding that
‘*fe]valuation of the preemption claim would involve detailed
factfinding . . .”’ Jd.’ Relying principally on the Burford
abstention doctrine, the Court of Appeals concluded that ‘‘the
6 On December 6, 1983, well after the decision of the Fourth Circuit in
this case, North Carolina's intermediate appellate court affirmed the
NCUC’s orders in all respects. Although the federal courts had held that the
federal issues raised by Alcoa and Tapoco could not be resolved without
“detailed factfinding,” the North Carolina Court of Appeals rejected the
federal preemption arguments without making any factual findings of its
own, or remanding the case to the NCUC for further development of the
factual record.
7 Although petitioners do not seek review on certiorari of the Court of
Appeals’ holding that ‘‘detailed factfinding’’ would be necessary to adjudi-
cate their federal claims, they believe this holding to be clearly erroneous.
This holding, which the Court of Appeals uncritically adopted from the
District Court’s opinion, was based on the District Court’s erroneous view
that there was ‘‘no controlling authority for the proposition that the NCUC
is bound to accept in its independent regulatory bailiwick a ra’* of purchas-
ing electricity approved by FERC as Nantahala’s cost of service.”’ (29a). The
law, however, is clearly to the contrary. F.P.C. v. Southern California
Edison Co., supra. See, e.g., Narragansett Electric Co. v. Burke, 381 A.2d
1358 (S.Ct. R.I. 1977), cert. denied., 435 U.S. 972 (1978). Once it is
recognized that the NCUC must accept, for its own ratemaking purposes, the
terms of federally-regulated power supply arrangements, it becomes unde-
niably apparent, from the language of the NCUC order quoted above, that
the NCUC has refused to accept the full preemptive effect of federal
regulation.
war,” |
9
federal court need not engage in such factfinding as a prerequi-
site to abstention.’’ Jd. In so holding, the Court of Appeals,
like the District Court, made no attempt to weigh or balance
the relative interests of the state and federal governments in the
resolution of the preemption issues which had been raised in
this case.
REASONS FOR GRANTING THE PETITION
This Court Should Address The Important Questions Of
Whether, And In What Circumstances, The Federal Courts
Should Abstain From Adjudicating Allegations That A State
Has Contravened A Preemptive Federal Statutory Scheme.
Because fundamental questions of federalism are raised
whenever the federal courts are asked to refrain from exercis-
ing their jurisdiction, this Court’s recent decisions have sought
to develop the rules governing the application of the abstention
doctrine on a cautious, case-by-case basis.* This case, together
with the case of Brown v. Hotel & Res. Emp. & Bar. Int.
Union 54, Case Nos. 83-498 and 83-573, in which this Court
noted probable jurisdiction mn November 28, 1983, presents
the Court with an opportunit ' to address the important ques-
tions of whether, and in whi circumstances, the abstention
doctrine can be invoked to ba claims based on federal statu-
tory preemption. The Fourth \.‘rcuit’s decision, which con-
flicts both with the Third Circuit’s decision in the Brown case
and with recent decisions of the Second and Ninth Circuits, is
an unprecedented expansion of the abstention doctrine to
encompass a whole category of cases to which that doctrine
had not previously been applied, and the decision below is
8 For example, in Moore v. Sims, 442 U.S. 415, 423 n.8 (1979), the
Court was careful to point out that “we do not remotely suggest that every
pending proceeding between a state and a federal plaintiff justifies abstention
unless one of the exceptions to Younger applies.” Similarly, the Court has
expressly reserved decision on the question of whether Younger abstention
may be applied when, as in this case, a pending state proceeding is before a
State administrative agency rather than a state court. Fair Assessment in Real
Estate Ass'n v. McNary, 454 U.S. 100, 112 (1981).
10
therefore one of great significance which should be reviewed
by this Court.
Point I.
This Court Should Consider The Important Question,
Which Has Divided The Circuit Courts, Of Whether Absten-
tion Is Ever Appropriate When A Federal Plaintiff Alleges
That A State Agency Has Violated A Preemptive Federal
Statutory Scheme.
The Court of Appeals rejected petitioners’ argument that
abstention is never appropriate when a plaintiff asserts claims
based on federal statutory preemption. The Court of Appeals
decided this important issue erroneously, because it failed to
undertake any meaningful analysis of whether the purposes of
the abstention doctrine, and the considerations of comity and
federalism on which that doctrine is based, would be served by
relegating federal preemption claims to the state courts.
A. The Considerations Of Comity And Federalism Which
Are The Basis For The Abstention Doctrine Are Never
Served By Dismissing Federal Preemption Claims.
As this Court recognized in Colorado River Conservation
District v. United States, 424 U.S. 800, 813-17 (1976), there are
three variants of the abstention doctrine, which are generally
known as Pullman, Burford, and Younger abstention. Rail-
road Comm’n v. Pullman Co., 312 U.S. 496 (1941); Burford v.
Sun Oil Co., 319 U.S. 315 (1943); Younger v. Harris, 401 U.S.
37 (1971). Although these three forms of abstention had their
origins in three separate decisions of this Court, in application
they frequently overlap and, in particular, the Burford and
Younger doctrines on which the lower courts relied in this case
are very similar in substance.’
9 Both the Burford and Younger doctrines are basically concerned
with preventing unnecessary federal interference with state proceedings
involving matters which are of strong, legitimate interest to the state. The
two doctrines evolved separately because the Younger doctrine originally
At bottom, the abstention doctrine in all of its forms is
founded on considerations of federalism and comity. Huffman
v. Pursue, Ltd., 420 U.S. 592, 606 (1975). The doctrine
counsels that when a state is attempting to develop or enforce
the state’s policies concerning matters which, under the federal
system, are properly of state rather than federal concern, the
federal courts should not, absent exigent circumstances, inter-
fere in the state proceedings. For example, this Court has
characterized the Burford doctrine, on which the Court of
Appeals principally relied below, as appropriate only in cases
“where there have been presented difficult questions of state
law bearing on policy problems of substantial public import
whose importance transcends the result in the case at bar” and
where “federal review of the [state law] question. . . would be
disruptive of state efforts to establish a coherent policy with
respect to a matter of substantial public concern.” Colorado
focused on the circumstances in which a federal court could properly
intervene in pending state criminal proceedings, while the Burford doctrine
dealt with other forms of state regulatory activity. In recent cases, however,
the Court has blurred the distinction between the two doctrines by holding
that Younger abstention may be appropriate when the state is a party to “civil
proceedings in which important state interests are involved.” Moore v. Sims,
442 U.S. 415, 423 (1979). To the extent that Younger abstention applies to
state proceedings which are civil rather than criminal in nature, it creates a
substantive standard for abstention which would appear to be virtually
identical to the Burford test.
Pullman abstention, the third recognized variant of the abstention doc-
trine, is somewhat different from Burford and Younger abstention, and has
no relevance here. Under Pullman, a federal court may abstain from
deciding a constitutional challenge to an ambiguous state statute if a narrow
construction of the statute by the state courts would cure the alleged
constitutional deficiency. Pullman abstention is thus based not only on the
considerations of comity and federalism that underlie the Burford and
Younger doctrines, but also on the more general notion that constitutional
adjudications should be avoided if a more limited ground for decision may
be available. Harmon v. Forssenius, 380 U.S. 528, 534 (1965). The Puliman
doctrine cannot be invoked to support the lower courts’ decisions in this case
because, under Pulimaa, the federal court may not dismiss the federal case,
as the lower courts did here, but must instead retain jurisdiction until the
parties have repaired to the state courts for an interpretation of the relevant
state law. England v. Bd. af Medical Examiners, 375 U.S. 411 (1964).
12
River Conservation District v. United States, supra, 424 U.S.
at 814 (emphasis supplied). Similarly, this Court’s decisions
applying the more recent Younger variant of the abstention
doctrine have “imposed a requirement that the State must
show that it has an important interest to vindicate in its own
courts before the federal court must refrain from exercising
otherwise proper federal jurisdiction.” Trainor v. Hernandez,
431 U.S. 434, 448 (1977) (Blackmun, J., concurring). Accord,
Moore v. Sims, 442 U.S. 415, 423 (1979).
These notions of comity and federalism, which lead the
federal courts to defer to state institutions when the state is
addressing subjects which the state is constitutionally free to
regulate, have no relevance to preemption cases. Allegations
that a state agency has attempted to circumvent a preemptive
federal regulatory scheme charge that it is the state, rather than
the federal court or the federal plaintiff, which has disregarded
the constitutional allocation of power between the state and
federal governments. As the Court of Appeals for the Ninth
Circuit has observed:
A preemption claim alleges in essence that Congress has
determined that particular matters are of national concern
and should be administered by national, rather than local
institutions. If a preemption claim is well-founded, there-
fore, Burford abstention cannot be appropriate.
LB.E.W. v. PS.C., 614 F.2d 206, 212, n.1 (9th Cir. 1980)
(emphasis supplied). Accord, Knudsen Corp. v. Nevada State
Dairy Comm., 676 F.2d 374, 377 (9th Cir. 1982).
Similarly, in the Brown case in which this Court recently
noted probable jurisdiction, the Third Circuit held that Bur
ford abstention “has no application” to a complaint alleging
federal preemption, for the following reason:
[N]o argument can be entertained based on disruption of
a state administrative scheme in a case in which the court
is asked to decide whether the very existence of that
scheme violates a paramount federal statute.
Hotel & Res. Emp. & Bar. Int. Union 54 v. Danziger, 709 F.2d
815, 832 (3rd Circuit), probable jurisdiction noted, sub nom.
13
Brown v Hotel & Res., etc., U.S. (Case Nos. 83-498
and 83-573, Nov. 28, 1983). The Third Circuit further held in
that case that Younger abstention was not appropriate because:
[W]hen the issue tendered to a federal district court is the
very power [of the state tribunal], as a matter of federal
law, to entertain a threatened proceeding, the principles
of comity and federalism which apparently animate the
Younger v. Harris rule are totally inapplicable.
709 F.2d at 833.
“The application of the abstention doctrine requires “sensitiv-
ity to the legitimate interests of both State and National
Governments. . .,” Younger v. Harris, supra, 401 U.S. at 44,
and thus depends on a “balancing [of] the federal and state
interests. . .” Trainor v. Hernandez, supra, 431 U.S. at 448
(Blackmun, J., concurring). When a federal plaintiff alleges
that a state agency has contravened a preemptive federal
regulatory scheme this balancing process must result in the
retention of jurisdiction by the District Court, because the
federal government has an obvious interest in protecting the
integrity of the federal regulatory process, while the state has
no legitimate interest in enforcing state regulations which have
been preempted by federal statute. Baggett v. Dept. of Profes-
sional Regulation, 717 F.2d 521, 523-4 (11th Cir. 1983). In
these circumstances, invocation of the abstention doctrine is
“inconsistent with [the federal courts’] paramount duty to
interpret and protect federal policies . . .” Kennecott Corp. v.
Smith, 637 F.2d 181, 187 (3rd Cir. 1980).
B. The Fact That Federal Law Provides The Rule Of Deci-
sion In Preemption Cases Is A Further Reason Why
Abstention Is Not Appropriate.
One of the considerations of comity and federalism which
the abstention doctrine addresses is the concern that a federal
court’s failure to defer to a state court might create an
impression in the public mind that the state courts were not
competent to rule on questions of state law, or on fundamental
constitutional questions that form the common foundation of
14
the federal and state judicial systems. Thus, this Court has
recognized that a refusal to abstain in a case involving constitu-
tional issues “can readily be interpreted as reflecting negatively
upon the state court’s ability to enforce constitutional princi-
ples.” Huffman v. Pursue, Ltd., supra, 420 U.S. at 604,
quoting from Steffel v. Thompson, 415 U.S. 452, 462 (1974).
Similarly, the Court’s decision in the Colorado River Conserva-
tion District case, quoted at p. 11, supra, recognized that the
Burford doctrine is intended principally to avoid federal adju-
dication of important questions of sate law in cases in which,
for example, the federal court’s jurisdiction is invoked on the
basis of diversity of citizenship."°
These concerns have no relevance when a federal plaintiff
alleges that a federal statute has preempted state jurisdiction.
Resolution of the preemption claim turns entirely on the
construction and application of the federal statute, and, as this
Court has observed, “the federal courts are particularly appro-
priate bodies for the application of preemption principles.”
United Mine Workers v. Gibbs, 383 U.S. 715, 729 (1966).
Accord, Hagans v. Lavine, 415 U.S. 528, 548, 550 (1974). See,
also, Northern State Gas Co. v. S.C.C. of Kansas, 372 U.S.
84, 96-98 (1963). The exercise of federal jurisdiction in a
preemption case does not cast an invidious inference as to the
competence of the state courts to adjudicate constitutional or
state-law issues, but simply recognizes that the federal courts
have superior expertise in the construction and application of
federal statutes, just as the state courts are, as the federal
courts concede, the definitive authorities on questions of state
law. See, e.g. O’Brien v. Skinner, 414 U.S. 524, 531 (1974).
10 The Court of Appeals decision below incorrectly interpreted the
Burford doctrine when it invoked Burford to justify its decision to abstain
from adjudicating petitioners’ claims, which required the application of
JSederal, rather than state, law.
15
C. The History And Evolution Of The Abstention Doctrine
Demonstrate That The Doctrine Was Not Intended To Bar
Adjudication of Claims Based On Federal Statutory Pre-
emption.
The abstention doctrine is in large measure a response to this
Court’s decision in Ex Parte Young, 209 U.S. 123 (1908),
which the Court has characterized as “the watershed case
which sanctioned the use of the Fourteenth Amendment to the
United States Constitution as a sword as well as a shield
against unconstitutional conduct of state officers.” Juidice v.
Vail, 430 U.S. 327, 335 (1977). In Ex Parte Young, the Court
held that the sovereign immunity guaranteed to the states by
the Eleventh Amendment did not prevent the federal courts
from entertaining suits to enjoin state officials from enforcing
state regulations which were contrary to the federal constitu-
tion.
Ex Parte Young created a mechanism by which federal
courts could vindicate the supremacy of federal law, but it also
had the undesirable effect of opening the federal courts to
plaintiffs who sought to raise broad-ranging challenges, gener-
ally on substantive due process grounds, to state regulatory
statutes. See Swift & Co. v. Wickham, 382 U.S. 111, 116-119,
127 (1965). To restore the balance between the state and federal
jurisdictions, Congress enacted legislation which restricted the
federal courts’ ability to hear these challenges. The statutes
which, in essence, legislatively created the abstention doctrine
included former 28 U.S.C. § 2281, which required that consti-
tutional challenges to state statutes be heard by special three-
judge courts, and the Johnson Act of 1934, 28 U.S.C. § 1342,
which prevented the federal courts from enjoining the enforce-
ment of state ratemaking orders if certain specified conditions
were satisfied.
What is significant about these “abstention” statutes is that
they did not overrule Ex Parte Yeung or withdraw all federal
jurisdiction over challenges to state laws and regulations.
Rather, the statutes struck a balance which, in each instance,
left the federal court’s jurisdiction over federal statutory pre-
emption claims unaffected by the legislation. Thus, as this
16
Court held in Swift & Co. v. Wickham, supra, former 28
U.S.C. § 2281 was not intended by Congress to require a
three-judge court in preemption cases, for the following rec.
son:
[Congress’] ire was aroused by the frequent grants of
injunctions against the enforcement of progressive state
regulatory legislation, usually on substantive due process
grounds. Requiring the collective judgment of three
judges and accelerating appeals to this Court were de-
signed to safeguard important state interests. In contrast,
a case involving an alleged incompatibility between state
and federal statutes, such as the case before us, involves
more confining legal analysis and can hardly be thought
to raise the worrisome possibilities that economic or
political predilections will find their way into a judgment.
382 U.S. at 127.
Similarly, this Court held relatively early in the history of the
Johnson Act that the Act did not prevent federal courts from
enjoining state ratemaking orders which were challenged on
preemption grounds. By its terms, the Johnson Act may be
invoked only if the state order “does not interfere with inter-
state commerce.” 28 U.S.C. § 1342(2). In RU.C. v. United
Fuel Gas Co., 317 U.S. 456, 469-70 (1943), the Court ruled
that orders of state commissions “ ‘interfere with interstate
commerce’ to the extent that they constitute an attempt to
regulate matters in interstate commerce which Congress has
lodged exclusively with the Federal Power Commission.”
This Court’s adoption of the Burford abstention doctrine
was largely an effort to fill the interstices left by legislation, by
requiring abstention, as a matter of judicial discretion, in cases
in which the policies underlying the Johnson Act favor absten-
tion, but the Act is not directly applicable by its terms because
the challenged state law or regulation does not concern rate-
making. See Alabama PS.C. v. Southern R. Co., 341 U.S.
341, 350-51 (1951). Just as it did in construing the “abstention”
statutes, the Court held that the Burford doctrine does not
require the federal courts to abstain from deciding preemption
cases:
4°
17
Federal courts seek to avoid needless conflict with state
agencies and withhold relief by way of injunction where
state remedies are available and adequate. But where
Congress, acting within its constitutional authority, has
vested a federal agency with exclusive jurisdiction over the
subject matter and the intrusion of a state would result in
conflict of function, the federal court may enjoin the state
proceeding in order to preserve the federal right.
Capital Service, Inc. v. N.L.R.B., 347 U.S. 501, 504 (1954)
(citations omitted)."'
In recent years, the Court’s consideration of abstention
issues has occurred primarily in the context of the Younger line
of cases. For the most part, these cases, like the earlier cases
which led to the legislation discussed above and the Burford
doctrine, have involved broad, fundamental challenges to state
regulatory schemes (although these challenges have generally
relied on procedural due process grounds rather than on the
substantive due process arguments raised in the earlier cases).
This Court has not yet ruled on the question of whether the
Younger doctrine may be invoked to bar claims based on
preemption, although it may have occasion to do so in the
pending Brown case if it resolves other issues against the
appellants.’ However, as discussed above, the Younger doc-
trine is based on the same considerations of federalism and
comity, and requires the same balancing of state and federal
interests, as the other abstention doctrines. The Courts of
11 In so holding, the Court distinguished Alabama PS.C. v. Southern
R. Co., supra, which had applied the Burford doctrine, and relied upon
PU.C. v. United Fuel Gas Co., supra.
12‘ The principal issue raised by the jurisdictional statements in Brown
is whether, on the merits, federal law has preempted the challenged state
regulation. If the Court rules for the appellants on this issue, the abstention
issue will be moot. By contrast, the Fourth Circuit's decision in this case
squarely presents the issue of whether abstention is appropriate in preemp-
tion cases, because the lower court assumed for purposes of affirming the
dismissal of petitioners’ preemption claims that those claims were valid but
could not be proved without factfinding.
18
Appeals which have considered the question (other than the
Fourth Circuit in this case) have therefore held that the
Younger doctrine, like the other forMs of abstention, has no
applicability in preemption cases. Hotel & Res. Emp. & Bar
Int. Union 54 v. Danziger, supra; Stone & Webster Engineering
Corp. v. Ilslely, 690 F.2d 323, 326 n. 2 (2nd Cir. 1982), aff'd,
103 S.Ct. 3564 (1983).
A review of the development of abstention principles in the
seventy five years since Ex Parte Young thus demonstrates that
claims of federal statutory preemption stand on a special
footing, and do not present appropriate occasions for the
federal courts to abstain from exercising their jurisdiction.
This inapplicability of the abstention doctrine to preemption
cases is explained in part by the overriding federal interest in
protecting the integrity of a preemptive federal statutory
scheme. On the other side of the balance, federal adjudication
of claims based on federal statutory preemption involve “a
more confining legal analysis” than broad due-process chal-
lenges, Swift & Co. v. Wickham, supra, 382 U.S. at 127, and
the important federal interests which preemption cases raise
can be vindicated without disrupting the basic statutory and
procedural framework which the state has adopted to regulate
matters properly within its jurisdiction.’ The fundamental
concerns underlying the evolution of the abstention doctrine
therefore have no application, and the Court of Appeals erred
when it extended that doctrine to preemption cases.
13 For example, the injunctive relief which Alcoa and Tapoco seek here
would not invalidate the NCUC’s basic procedures or leave the NCUC
procedurally incapable of regulating local utility rates, but would only
require the NCUC to accept, for its own ratemaking purposes, the way in
which the superior federal authorities have regulated Nantahala’s power
supply arrangements. By contrast, the relief sought on due process grounds
in many of the Younger line of cases would have invalidated basic procedures
which the state had adopted to implement and enforce its policies, leaving the
state no lawful way of performing important functions which are the
responsibility of the local, rather than the federal, government.
19
D. The Court Should Resolve The Conflict Between The
Circuits As To Whether The Federal Courts Should
Abstain In Preemption Cases.
For the reasons discussed above, the question of whether the
federal courts should abstain from adjudicating claims based
on federal statutory preemption is an important one which
should be addressed by this Court. The Court should also hear
this case to resolve the conflict between the Fourth Circuit’s
resolution of this issue, and the contrary holdings of other
circuits. Within the past two years, the Second Circuit, the
Third Circuit and the Ninth Circuit have squarely rejected the
argument, accepted by the Fourth Circuit .n this case, that
abstention can properly be invoked to dismiss preemption
claims. Knudsen Corp. v. Nevada State Dairy Comm., supra,
676 F.2d at 377; Stone & Webster Engineering Corp. v. /Islely,
supra, 690 F.2d at 320, n.2; Hotel & Res. Emp. & Bar. Int.
Union 54 v. Danziger, supra, 709 F.2d at 832. Although the
Court has noted probable jurisdiction in the pending Brown
case to review the Third Circuit’s decision in the last cited case,
it is quite possible that the Court will decide that appeal on
other grounds without reaching the abstention issue, see p. 17,
n.12, above, and it is therefore appropriate that the Court
grant this petition to assure the resolution of the conflict
between the circuits on this important question of federalism."
The conflict between the Fourth Circuit’s decision and prior
authority is even broader than the citation of recent circuit
14. ~+Whhile the three circuits identified above have adopted a categorical
rule, contrary to the Fourth Circuit's decision here, that abstention is never
appropriate in preemption cases, the Eleventh Circuit, in a recent decision
holding that absention was inappropriate in the particular preemption case
then before it, stated in dicta that “[i}t would be an overstatement to suggest
that when the question is one of preemption, abstention . . . is never
appropriate.” Baggett v. Dept. of Professional Regulation, 717 F.2d 521, 524
(11th Cir. 1983). However, unlike the Fourth Circuit in this case, the Lieventh
Circuit recognized that the appropriateness of abstention in a preemption
case turns on a balancing of state and federal interests, rather than on the
question of whether factfinding is necessary to adjudicate the federal pre-
emption claims. See p. 22, n.17, infra.
20
court decisions suggests. At least since this Court decided the
Capital Service case, supra, in 1954, it seems to have been
generally accepted that abstention is not appropriate in pre-
emption cases, and many courts have entertained preemption
challenges to state regulations or orders with little or no
discussion of the abstention issue. For example, in Stone &
Webster Engineering Corp. v. Ilslely, supra, 690 F.2d at 326,
n.2, the Second Circuit rejected the argument that the federal
courts should abstain in a footnote, which stated without
analysis that abstention “is not appropriately invoked in a
preemption case.”'* Similarly, this Court recently held in Edgar
v. MITE Corp. 457 U.S. 624 (1982), that a state corporate-
takeover statute violated the Commerce Clause, and the Court
ruled in Jones v. Rath Packing Co., 430 U.S. 519 (1977), that a
state weights-and-measures statute had been preempted by
federal law, even though, in both of these cases, state enforce-
ment proceedings were pending at the time the federal litiga-
tion was commenced and, on the Fourth Circuit’s theory,
abstention would have been appropriate.
In summary, the decision of the Court of Appeals in this case
results in an important change in the established law of this
Court and other circuits which will significantly alter the
relationship between the federal courts and the states, and that
decision should be reviewed by this Court.
15 The Second Circuit had previously held in Chemical Specialties
Mfrs. Ass’n v. Lowery, 452 F.2d 431 (2d Cir. 1971), that the abstention
doctrine was not applicable in a preemption case.
21
Point Il.
Assuming That Abstention May In Some Circumstances Be
Proper In A Preemption Case, This Court Should Decide The
Important Issue Of Whether The Court Of Appeals Es-
tablished The Correct Legal Standard For Determining When
Abstention Is Appropriate.
For the reasons discussed above, petitioners urge this Court
to adopt a clear-cut rule that abstention is never appropriate
when a plaintiff raises claims based on federal statutory pre-
emption. Assuming that the Court is not prepared to adopt this
categorical rule, it should nonetheless review this case to
consider the equally important issue, which is not raised by the
Brown case already before the Court, of when, and in what
circumstances, the abstention doctrine may properly be in-
voked to bar preemption claims."
The Court of Appeals’ decision below purported to recog-
nize that “[t]he presence of a preemption claim . . . may in
some cases require a refusal to abstain.” (12a). The lower
court, however, believed that in this case “evaluation of the
preemption claim would involve detailed factfinding . . .” and
held that “the federal court need not engage in such factfinding
as a prerequisite to abstention.” Jd.
The Court of Appeals’ approach to the abstention issue is
novel and entirely unprecedented. As demonstrated above, all
prior decisions applying the abstention doctrine had turned on
the relative interests which the state and federal governments
had in the resolution of the underlying substantive controversy.
The Court of Appeals’ decision simply ignores the balancing of
state and federal interests which had previously been consid-
16 Review of the Fourth Circuit’s decision in this case would be
particularly important if the Court reaches the abstention issue in Brown and
rejects the Third Circuit's per se rule against abstention in preemption cases.
This case would then provide a vehicle through which the Court might
provide guidance to the lower courts as to the factors they must weigh and
consider in determining which preemption cases are appropriate candidates
for abstention.
22
ered necessary to determine whether abstention is appropriate
and holds that a federal court may abstain solely because the
resolution of plaintiffs’ ‘ederal claims would require the court
to adjudicate a factual controversy."’
The Court of Appeals’ decision is also contrary to the
general federal rule that in deciding a motion to dismiss, a
court must accept the well pleaded allegations of the complaint
as true. See, e.g., Lemon v. Kurtzman, 403 U.S. 602, 620, 669
(1/71). Furthermore, the rule adopted by the Court of Appeals
in this case would allow state officials who have allegedly
ignored preemptive federal regulatory provisions to prevent the
exercise of federal jurisdiction by the simple expedient of
denying the allegations of the complaint, and the decision
below thus greatly expands the applicability of the abstention
doctrine.
The Court of Appeals sought to bolster its holding that
abstention was appropriate by observing that, after the District
Court dismissed their complaint, Alcoa and Tapoco attempted
to raise their federal claims on appeal from the NCUC’s orders
to the North Carolina courts. However, while the availability
of a potential remedy in the state courts is a necessary prereq-
17 As indicated above, the Eleventh Circuit’s decision in the Baggett
case, supra, which declined to adopt a per se rule against invoking the
abstention doctrine in preemption cases, recognized that the determination of
whether abstention was appropriate in such a case required a balancing of the
substantive interests of the state and federal governments in the controversy,
and the court’s analysis did not take into account the factor, which the
Fourth Circuit found determinative, of whether the federal court would need
to adjudicate facts to resolve the federal claims. 717 F.2d at 523-24. Thus,
even with respect to the two circuits which recognize the possibility that the
abstention doctrine may be invoked in some preemption cases, there is a
conflict as to the test which should be applied to decide when abstention is
appropriate.
The Fourth Circuit's decision in this case is also contrary to the decision of
the Second Circuit in Chemical Specialties Mfrs. Ass’n v. Lowery, 452 F.2d
431, 440 (2d Cir. 1971), in which the Second Circuit rejected the argument
that the federal courts should abstain in favor of further factfinding
proceedings in the state courts, and remanded the case to the District Court
for “an orderly factual investigation by a federal court of the relationship
between the [local regulations] and the relevant federal laws.”
=
~~ oe
23
uisite to abstention, it has never been held to be a sufficient
ground in itself to justify the relinquishing of federal jurisdic-
tion over federal claims. See Middlesex County Ethics Com-
mittee v. Garden State Bar Ass’n, supra. In literally every case,
the federal plaintiff will, if his claims are dismissed, have the
option of presenting his federal issues to a state court and,
ultimately, seeking review in this Court. However, as this Court
firmly held in Colorado River Conservation District v. United
States, supra, and Moses H. Cone Mem. Hosp. v. Mercury
Const. Corp., supra, the pendency of a “parallel” state court
proceeding is not sufficient reason for dismissing a federal
action unless (1) one of the traditional abstention doctrines is
applicable or (2) “exceptional circumstances” exist which re-
quire dismissal.
In this case, the Court of Appeals relied entirely on its
erroneous holding that Burford abstention barred petitioners’
preemption claims, and the lower court neither discussed nor
purported to apply the alternative “exceptional circumstances”
test of the Colorado River case. Further, the Court of Appeals’
determination that the federal courts could not adjudicate
petitioners’ preemption claims without factfinding does not
constitute “exceptional circumstances” justifying dismissal un-
der the Colorado River standard, which is “considerably more
limited” than the abstention doctrine. 424 U.S. at 818.
Like the abstention doctrine, the application of the “excep-
tional circumstances” test requires “a careful balancing of the
important factors as they apply in a given case, with the
balance heavily weighted in favor of the exercise of jurisdic-
tion.” Moses H. Cone Mem. Hosp. v. Mercury Const. Corp.,
supra, 103 S.Ct. at 937. The “most important factor” which
demonstrated that “exceptional circumstances” were present in
Colorado River itself was Congress’ enactment of legislation
specifically authorizing suits against the United States in the
state courts, which “represents Congress’s judgment that the
field of water rights is one peculiarly appropriate for compre-
hensive treatment in the [state] forums having the greatest
experience and expertise, assisted by state administrative offi-
cers acting under the state courts.” Moses H. Cone Mem.
24
Hosp. v. Mercury Const. Corp., supra, 103 S.Ct. at 937. By
contrast, “[a] preemption claim alleges in essence that Con-
gress has determined that particular matters are of national
concern and should be administered by national, rather than
local institutions,” /.B.E.W. v. PS.C., supra, 614 F.2d at 212,
n.1, so this key prerequisite to the application of the “excep-
tional circumstances” test is absent in a preemption case such
as this.
A second major factor in applying the “exceptional circum-
stance” test, which the Court of Appeals’ analysis did not
consider, is the question of whether “federal law provides the
rule of decision on the merits.” Moses H. Cone Mem. Hosp. v.
Mercury Const. Corp., supra, 103 S.Ct. at 941. The resolution
of the federal issues raised by petitioners in this case turns on
whether the Federal Power Act has preempted the NCUC’s
regulatory jurisdiction over Nantahala’s power supply arrange-
ments, and “the presence of [such] federal-law issues must
always be a major consideration weighing against surrender [of
federal jurisdiction].” Jd. at 942 (footnote omitted)."*
In short, the result which the Court of Appeals reached in
this case cannot be justified under the “exceptional circum-
stances” test, which the Court of Appeals simply ignored, nor
18 If the Court of Appeals had attempted to apply the “exceptional
circumstances” balancing test, it would have been required to consider, in
addition to the two major factors identified above, (1) the relative geographic
convenience of the state and federal courts, (2) the order in which the two
courts achieved jurisdiction over the controversy, and (3) the possibility of
avoiding “piecemeal” litigation. Of these subsidiary factors, the first two
clearly do not favor dismissal, since (1) the state appellate courts and the
District Court are both located in Raleigh, North Carolina, and (2) the
petitioners brought their federal suit against the NCUC before the state court
appeals were commenced, and raised their federal issues in the state courts
only after the District Court dismissed their complaint. The third factor, the
desirability of avoiding duplicative adjudication, is not sufficient in itself to
justify relinquishing federal jurisdiction, see Colorado River Conservation
District v. United States, supra, and, in any event, is of little or no force here
because the issues of federal law which petitioners seek to raise are “easily
severable” from the state-law ratemaking issues which the state appellate
courts will address. Moses H. Cone Mem. Hosp. v. Mercury Const. Corp.,
supra, 103 S.Ct. at 939.
25
under the alternative balancing test of the abstention doctrine,
which the lower court misapplied. The Court of Appeals’
decision to relegate petitioners’ federal preemption claims to
the state courts to avoid the need for factfinding in the federal
courts adopts a standard for relinquishing federal jurisdiction
which is considerably easier for a defendant to satisfy than any
test which this Court has ever approved under either the
abstention doctrine or the “exceptional circumstance” line of
cases. Because the standard applied by the Court of Appeals
would effectively destroy the careful balance which both of
these lines of cases have drawn between competing state and
federal interests, and because the Court of Appeals’ decision is
inconsistent with the basic rule that in the absence of an
adequate reason for relinquishing jurisdiction, the federal
courts have “the virtually unflagging obligation . . . to exer-
cise the jurisdiction given them . . .” Colorado River Conser-
vation District v. United States, supra, 424 U.S. at 817, the
Court should grant this petition to consider whether the Court
of Appeals adopted an appropriate test for determining when
abstention is appropriate in preemption cases.
ia
26
CONCLUSION
For the foregoing reasons, this petition for a writ of cer-
tiorari should be granted.
December 16, 1983
Respectfully submitted,
RONALD D. JONES
Counsel of Record for Petitioners
Aluminum Company of America
and Tapoco, Inc.
GRANT S. LEWIS
DAVID R. POE
JOHN S. KINZEY
LEBOEUF, LAMB, LEIBY & MACRAE
520 Madison Avenue
New York, New York 10022
(212) 715-8000
RICHARD L. HOLZ
1501 Alcoa Building
Pittsburgh, Pennsylvania 15219
(412) 553-4345
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
+
No. 82-1733(L)
Aluminum Company of America, a Pennsylvania Corpora-
tion, and Tapoco, Inc., a Tennessee Corporation,
Appellants,
Vv.
Utilities Commission of the State of North Carolina; Robert
K. Koger, Leigh M. Hammond, Sarah Lindsay Tate, John
W. Winter, Edward B. Hipp, A. Hartwell Campbell, and
Douglas O. Leary, in their respective official capacities as
Chairman and Commissioners of the North Carolina Utili-
ties Commission,
Appellees,
Rufus L. Edmisten, Attorney General of North Carolina,
Amicus Curiae,
United Steelworkers of America, AFL-CIO,
and Local Union 309,
Amicus Curiae.
es
No. 82-1765
State of Tennessee, Tennessee Office of Economic
and Community Development,
Appellants,
and
2a
Aluminum Company of America, a Pennsylvania Corpora-
tion, and Tapoco, Inc., a Tennessee Corporation,
Plaintiffs,
Vv.
Utilities Commission of State of North Carolina, Robert L.
Koger, Leigh M. Hammond, Sarah Lindsay Tate, John W.
Winter, Edward B. Hipp, A. Hartwell Campbell and
Douglas O. Leary, in their respective official capacities as
Chairman and Commissioners of the North Carolina Utili-
ties Commission,
Appellees,
Rufus L. Edmisten, Attorney General of North Carolina,
Amicus Curiae,
United Steelworkers of America, AFL-CIO,
and Local Union 309,
Amicus Curiae.
+
Appeals from the United States District Court for the
Eastern District of North Carolina at Raleigh. Franklin T.
Dupree, Jr., District Judge.
——
Before
MURNAGHAN and ERVIN, Circuit Judges,
and KELLAM, District Judge.*
—-
. Honorable Richard B. Kellam, Senior United States District Judge
for the Eastern District of Virginia, sitting by designation.
3a
Argued: April 11, 1983 Decided: July 28, 1983
oe
Grant S. Lewis (Ronald D. Jones, David R. Poe, John S.
Kinzey, LeBoeuf, Lamb, Leiby & MacRae on brief); Charles L.
Lewis, Assistant Attorney General (William M. Leech, Jr.,
Attorney General, William B. Hubbard, Chief Deputy Attor-
ney General; I. Edward Johnson, LeBoeuf, Lamb, Leiby &
MacRae; Richard L. Holz, Assistant General Counsel on brief)
for Appellants; Jerry W. Amos and Reid L. Phillips (Brooks,
Pierce, McLendon, Humphrey & Leonard on brief) for Appel-
lees; (Cooper, Mitch & Crawford; Jonathan R. Harkavy,
Smith, Patterson, Follin, Curtis, James & Harkavy; Carl B.
Frankel, United Steelworkers of America, AFL-CIO on brief)
as Amicus Curiae United Steelworkers of America, AFL-CIO;
(William T. Crisp, Robert F. Page, Crisp, Davis, Schwentker &
Page; Rufus L. Edmisten, Attorney General, Richard L. Grif-
fin, Assistant Attorney General on brief) as Amicus Curiae
Rufus L. Edmisten.
ERVIN, Circuit Judge:
The Aluminum Company of America (“Alcoa”) and its
wholly owned subsidiary, Tapoco, Inc. (“Tapoco”) appeal
from the United States District Court for the Eastern District
of North Carolina wherein their action against the Utilities
Commission of the State of North Carolina (“NCUC”) was
dismissed on abstention grounds. Alcoa and Tapoco brought
this action seeking to enjoin the enforcement of an NCUC
order which allegedly interferes with the operation of a pre-
emptive federal regulatory scheme and impermissibly burdens
interstate commerce. we conclude that abstention was
4a
appropriate under Burford v. Sun Oil Company, 319 U.S. 315
(1943), we affirm. '
Aicoa operates a large aluminum smelting plant in eastern
Tennessee and wholly owns two nearby electric utility compa-
nies, Tapoco and Nantahala Power and Light Company
(“Nantahala”). Nantahala is incorporated in North Carolina
and owns 11 hydroelectric plants in that state. Nantahala
provides retail electric service in six counties in western North
Carolina. NCUC regulates Nantahala’s retail rates. Tapoco is a
Tennessee corporation which owns four hydroelectric power
plants, two in North Carolina and two in Tennessee. Tapoco
provides electricity exclusively to Alcoa’s smelting plant, which
requires an enormous amount of energy.
The Tapoco and Nantahala dams are on streams which are a
part of the larger Tennessee River watershed which has been
developed for hydroelectric power production by the Tennessee
Valley Authority (“TVA”). In 1941, Alcoa and TVA entered
into an agreement, the “Fontana Agreement,” whereby TVA
was given the right to operate Tapoco’s and Nantahala’s dams.
The agreement provided that the electricity generated at those
dams would be transferred to TVA and that TVA would
transfer back to Alcoa an equal amount of electricity at
specified times and amounts. This agreement was superseded
1 Our decision on the abstention issue—to affirm the dismissal—effec-
tively moots the other appeal now before us, that of the United Steel Workers
of America, the collective bargaining union for some 3,500 employees at
Alcoa’s Tennessee plant, and the State of Tennessee Office of Economic and
Community Development. Those parties appeal the district court’s denial of
their motion to intervene under Fed. R. Civ. Proc. 24. We nevertheless note
that our review indicates that the interests of the existing plaintiffs and the
movants coincide and that the plaintiffs adequately have represented those
interests. Thus, the district court did not abuse its discretion in denying the
motion to intervene. See Commonwealth of Virginia v. Westinghouse Elec-
tric Corp., 542 F.2d 214 (4th Cir. 1976) (intervention by Virginia denied in
suit brought by utility against supplier of nuclear fuel).
n,
Sa
in 1963 by the “New Fontana Agreement,” effective through
December 31, 1982, under which TVA continued to operate the
dams, but returned to Alcoa a fixed entitlement of electricity
regardless of the amount generated at the Alcoa dams. A
supplemental agreement between Alcoa, Nantahala, and Ta-
poco apportioned the TVA fixed entitlement between Tapoco
and Nantahala. Under that supplemental agreement, Nanta-
hala received electricity at the favorable entitlement prices in
an amount equal to the greater of Nantahala’s actual produc-
tion or the theoretical minimum production of the Nantahala
system. If i\antahala needed more electricity than its TVA
entitlement, Nantahala had to purchase that additional elec-
tricity from the TVA at a price substantially higher than the
entitlement price.
In 1971, Nantahala and Tapoco entered into a new appor-
tionment agreement, reducing Nantahala’s TVA entitlement to
an amount equal to Nantahala’s theoretical minimum potential
generation, regardless of actual production. The remainder of
the entitlement goes to Tapoco for transfer to Alcoa’s plant.
Thus, under the 1971 agreement, Nantahala received less
electricity from TVA at the lower entitlement price, increasing
the cost to Nantahala’s North Carolina retail customers, and
Tapoco received more electricity from TVA at the lowér entitle-
ment price, decreasing the cost to Alcoa’s plant.
In 1976, Nantahala applied to the NCUC for an increase in
the rates it charges its retail customers. The NCUC permitted
certain ratepayers along with the North Carolina Attorney
General to intervene in the proceedings. The intervenors con-
tended that the relationships between Nantahala, Tapoco, and
Alcoa were unfair to Nantahala and its customers. In order to
rectify the inequity, the intervenors recommended that the
NCUC apply the “roll-in” method of rate making, that is, the
NCUC should consider Tapoco and Nantahala as a single
system for purposes of calculating Nantahala’s rate base. The
NCUC rejected the intervenors’ contention of unfairness and
did not consider the roll-in method.
On appeal by the intervenors, the North Carolina Court of
Appeals and the North Carolina Supreme Court agreed with
6a
the intervenors and directed the NCUC to consider using a
roll-in method. See Utilities Comm’n v. Edmisten, 252 S,E.2d
516 (N.C. Ct.App.), aff'd, 263 S.E.2d 583 (N.C. 1980).
_ On remand, Alcoa and Tapoco were made parties to the
proceedings, the NCUC heard additional evidence, and
adopted the roll-in method. In so doing, the NCUC found that
Nantahala and Tapoco constituted a single system, calculated
the fair value of the entire system, and determined what
portion of that total system is devoted to North Carolina
intrastate retail service. Rates were based on the cost of service
calculated from that apportionment. On September 2, 1981,
the NCUC entered an order reducing Nantahala’s rates and
requiring Nantahala to pay $18,962,000 in refunds to its
customers for the earlier years’ overpayments. The NCUC
joined Alcoa and Tapoco to the refund order because the
NCUC concluded that “Nantahala is financially unable to
make all the refunds required.”
Nantahala, Tapoco, and Alcoa petitioned the NCUC to
reconsider its September 2 order. On January 28, 1981, the
NCUC issued an affirmance of the September 2 order. The
NCUC orders then were appealed to the North Carolina Court
of Appeals. Nantahala, Alcoa, and Tapoco have submitted
their appellate briefs to that court, raising therein, among
other issues, the federal issues argued in this action.
Contemporaneously with the NCUC proceedings, the Fed-
eral Energy Regulatory Commission (“FERC”) was holding
proceedings on the New Fontana and 1971 apportionment
agreements. Under the Federal Power Act, 16 U.S.C.
§§ 791(a), ef seg., the FERC oversees the licensing of the
Nantahala and Tapoco plants, their sale of electricity in inter-
state commerce, and their wholesale of electricity. In 1976,
Nantahala applied to FERC for an increase in wholesale rates,
and in response, two wholesale customers and the North
Carolina Attorney General intervened, charging that Alcoa,
Nantahala, and Tapoco “are in violation of the Federal Power
Act by diverting for the benefit and private use of Alcoa,
hydroelectric power and facilities.” FERC declined to apply
the roll-in method of rate making, but did find that “the
7a
alleged fairness of the 1971 apportionment agreement is not
supported by the record” and modified that agreement “to
provide [TVA] entitlements to Nantahala which will result in
just and reasonable rates to its wholesale customers.” Nanta-
hala has appealed the FERC decision to this court. Nantahala
Power & Light Co. v. F.E.R.C., No. 82-1872.
On January 26, 1982, two days prior to the NCUC affirm-
ance of its September 2 order, Alcoa and Tapoco filed this
action in the United States District Court for the Eastern
District of Tennessee. By order dated April 12, 1982, the action
was transferred to the Eastern District of North Carolina. On
July 29, 1982, the district court dismissed the action. The
district court rejected NCUC’s arguments for dismissai for
lack of jurisdiction, but granted the dismissal on abstention
grounds. This appeal followed.
Il.
We are now confronted with two questions. First, did the
district court possess jurisdiction? Second, if so, did the
district court properly abstain from the exercise of that juris-
diction? We answer both questions in the affirmative.
A.
The NCUC puts forth three arguments in support of the
claim that the district court lacked jurisdiction: (1) the Johnson
Act, 28 U.S.C. § 1342, prohibits the district court’s exercise of
its injunctive power against the NCUC; (2) the action is barred
by the eleventh amendment; and (3) the alleged federal ques-
tions are merely defenses to be raised in the pending state
action and therefore cannot form the basis of federal question
jurisdiction. Those arguments are without merit.
Under the Johnson Act, 28 U.S.C. § 1342, Congress placed
Statutory limitations on the circumstances in which a federal
court could issue injunctions against state orders setting rates
for public utilities. The Johnson Act provides:
8a
The district courts shall not enjoin, suspend or restrain
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, where:
(1) Jurisdiction is based solely on diversity of citizenship
or repugnance of the order to the Federal Constitution;
and
(2) The order does not interfere with interstate com-
merce; and
(3) The order has been made after reasonable notice and
hearing; and
(4) A plain, speedy and efficient remedy may be had in
the court of such State.
The limitation applies only when all four conditions are met.
Since the first two conditions are not satisfied here, the
Johnson Act does not apply. Alcoa and Tapoco have based
jurisdiction upon federal questions, preemption and impermis-
sible interference with interstate commerce. Thus, jurisdiction
is not based “solely on diversity. . . or repugnance. . . to the
federal constitution.” See Int’! Brotherhood of Elec. Workers
v. Public Service Comm’n of Nevada, 614 F.2d 206, 210-11
(9th Cir. 1980). Moreover, the allegation that the NCUC order
impermissibly interferes with interstate commerce, if proven,
would defeat the second condition of the Johnson Act.
The eleventh amendment provides that federal jurisdiction
does not extend to a suit against a state by a citizen of another
state. In Ex Parte Young, 209 U.S. 123 (1968), the Court held
that the eleventh amendment did not prevent a suit to enjoin
state officials from enforcing a state rate regulation found to
be in violation of the federal constitution. That is precisely the
type of injunctive relief that Alcoa and Tapoco seek. See also
Kimble v. Solomon, 599 F.2d 599, 603 (4th Cir.), cert. denied,
444 U.S. 950 (1979).
Alleged federal questions that are, in fact, merely defenses
to be raised in the pending state action cannot form the basis
9a
of federal question jurisdiction. Public Service Comm’n of
Utah v. Wycoff, 344 U.S. 237 (1952); City National Bank v.
Edmisten, 681 F.2d 942 (4th Cir. 1982). In City National Bank,
this court stated:
The federal question must be an essential element of
plaintiff’s complaint; the anticipation of a defense which
arises under federal law does not establish federal juris-
diction. Louisville & Nashville Rd. Co. v. Mottley, 211
U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908). Accordingly,
in an action for a declaratory judgment, if the plaintiff is
seeking a declaration that it has a good defense to a
threatened action, it is the character of the threatened
action and not of the defense which determines whether
there is federal question jurisdiction. See Public Service
Commission v. Wycoff, 344 U.S. 237, 248, 73 S.Ct. 236,
242, 97 L.Ed. 291 (1952).
Id. at 945 (emphasis added). In that case, five banks sought a
declaratory judgment that a credit card fee would not consti-
tute interest under North Carolina law because such an in-
terpretation of the state law would cause a conflict with the
National Banking Act, 12 U.S.C. §§ 85, 86. The banks claimed
that the North Carolina Attorney General had threatened to
sue them if they charged the fee. This court ordered the action
dismissed, holding that the threatened action would have to be
brought, if at all, under North Carolina law and was not
converted into a federal action simply by the availability of a
federal defense.
The obvious distinction between City National Bank and the
present case is that the latter is not a declaratory judgment
action involving “the anticipation of a defense” or “a declara-
tion that it has a good defense to a threatened action.” Rather,
plaintiffs seek to enjoin an already-issued NCUC order. The
federal courts, of course, often entertain suits to enjoin the
enforcement of state orders which are alleged to have been
preempted by federal statutes or to burden unduly interstate
commerce. See, e.g., Public Utilities Commission of Ohio v.
United Fuel Gas Company, 317 U.S. 456 (1943); Kennecott
Corp. v. Smith, 637 F.2d 181 (3d Cir. 1980).
10a
B.
In Burford v. Sun Oil Company, 319 U.S. 315 (1943), the
court held that abstention was proper in a challenge to a Texas
state commission’s oil field proration order. The Court
reasoned:
These questions of regulation of the industry by the State
administrative agency. . . so clearly involve basic prob-
lems of Texas policy that equitable discretion should be
exercised to give the Texas courts the first opportunity to
consider them. . . . The state provides a unified method
for the formation of policy and determination of cases by
the Commission and by the state courts. The judicial
review of the Commission’s decision in the state courts is
expeditious and adequate. Conflicts in the interpretation
of state law, dangerous to the success of state policies, are
almost certain to result from the intervention of the lower
federal courts. On the other hand, if the state procedure is
followed from the Commission to the State Supreme
Court, ultimate review of the federal question is fully
preserved here . . . . Under such circumstances, a sound
respect for the independence of state action requires the
federal equity court to stay its hand.
Id. at 332-34 (citations omitted). See also Alabama Public
Service Comm’n v. Southern R. Co., 341 U.S. 341, 349 (1951)
(abstention required in challenge to state railroad commission
order; “As adequate state court review of an administrative
order based upon predominantly local factors is available to
appellee, intervention of a federal court is not necessary for the
protection of federal rights”).
The NCUC order establishes retail, intrastate rates for North
Carolina customers. The setting of those rates involved impor-
tant and basic considerations of state policy and was accom-
plished in accordance with the uniform statutory procedures
for the formation of that policy. See N.C.G.S. § 62-130, et seq.
lla
The NCUC order now is on appeal’ to the North Carolina
Court of Appeals and Alcoa, Nantahala, and Tapoco have
raised therein, along with certain state law issues,’ the same
federal issues that they are asking the federal courts to con-
sider. We therefore believe that the present case involves the
quintessential Burford setting of a complex state regulatory
scheme concerning important matters of state policy for which
impartial and fair administrative determinations subject to
expeditious and adequate judicial review are afforded. The
usual role of comity must govern; the district court properly
exercised its discretionary power to withhold relief so as to
avoid needless obstruction of North Carolina’s domestic
policy.
2 Not only are state proceedings pending, but the challenged NCUC
order was reached after a specific remand by the North Carolina Supreme
Court. While we need not decide whether abstention is appropriate here
under the “Our Federalism” doctrine, see Younger v. Harris, 401 U.S. 37
(1971); see generally C. Wright, Federal Courts § 52A (3d ed.), it is worth
noting the admonition in Huffman v. Pursue, Ltd., 420 U.S. 592, 608 (1975),
that federal courts should avoid intervention where state proceedings have
reached an advanced stage:
Intervention at the later stage is if anything more highly duplicative,
since an entire trial has already taken place, and it is also a direct
aspersion on the capabilities and good faith of state appellate courts.
Nor. . . is federal intervention at the appellate stage any the less a
disruption of the State’s efforts to protect interests which it deems
important.
3 Although the parties do not address the issue, Pullman abstention,
see Railroad Comm’n of Texas v. Pullman Co., 312 U.S. 496 (1941), also
may be called for here. Pullman abstention allows the federal courts to stay,
not dismiss, the action until the state courts in the state proceedings resolve
unsettled questions of state law that may make it unnecessary to decide a
federal constitutional question. An unsettled question of state law here is
whether the NCUC order can bind Alcoa and Tapoco to pay the refund due
from Nantahala. If the North Carolina courts decide that the NCUC has no
authority to bind Aicoa and Tapoco, then those companies, the plaintiffs
herein (Nantahala is not a plaintiff), will have no cause of action in the
federal courts; resolution of a pending state law question thus may make it
unnecessary to resolve the federal constitutional question.
12a
Alcoa’s primary argument against abstention is that absten-
tion is never appropriate where the federal plaintiff asserts a
preemption claim. See Int’l Brotherhood of Electrical Workers
v. Public Service Comm’n of Nevada, 614 F.2d 206, 212 n.1
(9th Cir. 1980). We decline to adopt such a per se rule.* The
presence of a preemption claim, however, may in some cases
require a refusal to abstain. Such a preemption claim must be
well founded, of course, and whether the challenged state
action conflicts with federal law must be readily discernible
from the pleadings. For example, abstention is inappropriate
where the federal government has preempted the field, see
Capital Service, Inc. v. N.L.R.B., 347 U.S 501 (1954) (labor
policy), or where there is a direct, facial conflict between state
and federal statutes, see Empire, Inc. v. Ashcroft, 524 F.Supp.
898 (W.D. Mo. 1981). In such cases, the basic premise of
abstention—avoiding needless federal court intervention into
important matters within the state’s jurisdiction to regulate—
obviously is lacking. The challenged state action clearly con-
flicts with preemptive federal law. This, however, is not such a
case. The NCUC order on its face sets only retail, intrastate
rates, an important matter traditionally within the sole discre-
tion of the states, and does not directly conflict with FERC’s
wholesale and interstate rate setting powers. Evaluation of the
preemption claim would involve detailed factfinding concern-
ing the indirect effects of the NCUC order on the rates
established by FERC and the contracts filed with FERC.
Where, as here, circumstances are otherwise appropriate for
* Burford abstention, the federal court need not engage in such
factfinding as a prerequisite to abstention.
Ill.
For the foregoing reasons, the district court’s order of
dismissal is
AFFIRMED.
4 Two other circuit courts have refused to exercise their jurisdiction
despite claims of federal preemption. See Allegheny Airlines, Inc. v. Penn.
Pub. Util Comm’n, 465 F.2d 237 (3d Cir.), cert. denied, 410 U.S. 943 (1973);
California v. Oroville-Wyandotte Irr. Dist., 409 F.2d 532 (9th Cir. 1969).
l3a
APPENDIX B
JUDGMENT
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 82-1733
+
Aluminum Company of America, a Pennsylvania Corpora-
tion, and Tapoco, Inc., a Tennessee Corporation;
Appellants,
vs.
Utilities Commission of the State of North Carolina; Robert
K. Koger, Leigh M. Hammond, Sarah Lindsay Tate, John
W. Winter, Edward B. Hipp, A. Hartwell Campbell, and
Douglas O. Leary, in their respective official capacities as
Chairman and Commissioners of the North Carolina Utili-
ties Commission,
Appellees,
Rufus L. Edmisten, Attorney General of North Carolina,
Amicus Curiae,
United Steelworkers of America, AFL-CIO,
and Local Union 309,
Amicus Curiae.
—t
Appeal from the United States District Court for the Eastern
District of North Carolina.
l4a
This cause came on to be heard on the record from the
United States District Court for the Eastern District of North
Carolina, and was argued by counsel.
On consideration whereof, It is now here ordered and
adjudged by this Court that the judgment of the said District
Court appealed from, in this cause, be, and the same is hereby,
affirmed.
/s/ William K. Slate, II
Clerk
lSa
APPENDIX C
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
--
No. 82-1733
Aluminum Company of America, etc., et al,
Appellants,
versus
Utilities Commission of the State of North Carolina, et al,
Appellees,
Rufus L. Edmisten, etc.,
Amicus Curiae,
United Steelworkers of America, etc.,
Amicus Curiae.
++
No. 82-1765
State of Tennessee, et al,
Appellants,
and
Aluminum Company of America, etc., et al,
Plaintiffs,
versus
“a
l6a
Utilities Commission of the State of North Carolina, et al,
Appellees,
Rufus L. Edmisten, etc.,
Amicus Curiae,
United Steelworkers of America, etc.,
Amicus Curiae.
—
ORDER
Upon consideration of the appellants’ petition for rehearing
and suggestion for rehearing en banc, and no judge having
requested a poll on the suggestion for rehearing en banc,
It is ADJUDGED and ORDERED that the petition for re-
hearing is denied.
Entered at the direction of Judge Ervin for a panel consist-
ing of Judge Murnaghan, Judge Ervin, and Judge Kellam.
For the Court,
/s/ William K. Slate, II
Clerk
17a
APPENDIX D
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
No. 82-376-CIV-5
ae
ALUMINUM COMPANY OF AMERICA, ef ano.,
Plaintiffs,
vs.
UTILITIES COMMISSION OF THE STATE OF
NORTH CAROLINA, et al.,
Defendants.
aoe
MEMORANDUM OF DECISION
Plaintiff Aluminum Company of America (Alcoa) operates
a large aluminum smelting plant in eastern Tennessee and owns
two nearby electric utility companies, Tapoco, Inc., a plaintiff
here, and the Nantahala Power and Light Company (Nanta-
hala). Nantahala provides retail electric service in six counties
in western North Carolina and its retail rates are regulated by
the defendant North Carolina Utilities Commission (NCUC).
Tapoco provides power exclusively to Alcoa’s operation, which
requires an enormous amount of energy.
In 1976 Nantahala applied to the NCUC for an increase in
the rates it charges its retail customers. Proceedings on that
application have been lengthy and Nantahala’s appeal from the
NCUC’s most recent rate order is currently before the North
Carolina Court of Appeals. As an outgrowth of those proceed-
18a
ings, Tapoco and Alcoa have brought this action for a declara-
tion that the NCUC’s order is unlawful and for an order
enjoining the NCUC from enforcing it. Plaintiffs have moved
for summary judgment on their claims, defendants have
moved to dismiss the action on several grounds, and additional
parties have moved to intervene. For an understanding of the
parties’ contentions and of the court’s disposition of the
pending motions, it is necessary first to review at some length
the complex factual and procedural background of the case.
As the North Carolina Supreme Court stated when this
matter was before it, “[t]he somewhat intricate factual back-
ground of this case is not generally in dispute.” State of North
Carolina ex rel. Utilities Commission v. Edmisten, 299 N.C.
432, 434, 263 S.E.2d 583 (1980). Nantahala and Tapoco are
wholly owned subsidiaries of Alcoa. Nantahala is incorporated
in North Carolina and owns eleven hydroelectric generating
plants, all but one of which are located on the Little Tennessee
River watershed and all of which are in this state. Although for
many years Nantahala transferred much of its total kilowatt
hour production to Alcoa’s plant in Tennessee, it has since
1971 exclustyely served retail and wholesale customers in North
Carolina. Tapoco on the other hand is a Tennessee corporation
which owns four hydroelectric generating plants in the same
watershed, two in North Carolina and two in Tennessee.
Tapoco supplies electricity to a single customer, Alcoa.
The Tapoco and Nantahala dams are on streams which are
part of the larger Tennessee River watershed which has been
developed for hydroelectric power production by the Tennessee
Valley Authority. The TVA has hydroelectric facilities in the
same vicinity as the Tapoco and Nantahala dams. In 1941
Alcoa and TVA entered into an agreement, known as the
“Fontana Agreement,” by which TVA was given the right to
operate Alcoa’s dams in coordination with TVA’s facilities. The
agreement provided that the hydroelectric power generated at
Alcoa’s dams would be transferred to TVA and that TVA
would return to Alcoa an equal amount of power at specified
times and amounts. This agreement was superseded in 1963 by ©
the “New Fontana Agreement,” effective through December
19a
31, 1982, under which TVA continues to coordinate the opera-
tion of Alcoa’s generating facilities but returns to Alcoa a fixed
quantity, or “entitlement,” of electricity regardless of the
amount produced by Alcoa’s facilities. See Exhibit B to Jones
Affidavit. A supplemental agreement between Alcoa, Nanta-
hala and Tapoco apportioned the TVA entitlement between
Nantahala and Tapoco. Under the 1963 apportionment, Nan-
tahala was to receive electricity at the favorable entitlement
prices in an amount equivalent to the greater of either Nanta-
hala’s actual production or an amount calculated to reflect the
theoretical minimum production of the Nantahala system.
Electricity needed by Nantahala (or Tapoco) when the demands
of its customers exceed the entitlement amount must be pur-
chased from TVA at a price substantially higher than the
entitlement price. Thus, under the 1963 agreement, Nantahala
was assured of receiving the advantageous price for at least all
the electricity it actually produced and was charged a premium
price for its additional, actual needs.
In 1971 Nantahala and Tapoco entered into a new appor-
tionment agreement, reducing Nantahala’s TVA entitlement to
an amount equivalent to Nantahala’s theoretical minimum
annual potential generation, regardless of actual production.
Exhibit C to Jones Affidavit. See Utilities Commission v.
Edmisten, supra, 299 N.C. at 436 and n.1; Federal Energy
Regulatory Commission Opinion No. 139 (May, 1982) at 3-4
(Exhibit D to Jones Affidavit). The remainder of the entitle-
ment goes to Tapoco for transfer to Alcoa’s plant. It is this
1971 apportionment agreement that has generated the present
controversy.
When Nantahala applied to the NCUC for a rate increase in
1976, the NCUC permitted certain ratepayers along with the
Attorney General of North Carolina (on behalf of the consum-
ing public) to intervene in the proceedings. The intervenors
contended that the relationships between Nantahala, Tapoco
and Alcoa were unfair to Nantahala and its ratepayers and that
the NCUC should consider Tapoco and Nantahala as a single
system for calculating Nantahala’s rate base in order to rectify
the inequity. The NCUC heard evidence and rejected this
a ade
20a
contention, concluding that the New Fontana and apportion-
ment agreements “were just and reasonable and to the benefit
of Nantahala’s customers.” Utilities Commission v. Edmisten,
supra, 299 N.C. at 440. The NCUC therefore declined to
employ a “roll-in” method of ratemaking.'
On appeal by the intervenors, the North Carolina Court of
Appeals reversed the NCUC and remanded the proceedings for
“a determination whether the consuming public of North
Carolina could benefit by having the assets and costs of
Tapoco rolled-in with those of Nantahala in determining Nan-
tahala’s rate structure.” State of North Carolina ex rel. Utili-
ties Commission v. Edmisten, 40 N.C. App. 109, 118, 252
S.E.2d 516 (1979). Nantahala appealed the decision of the
Court of Appeals, and the North Carolina Supreme Court
affirmed that portion of the lower court’s decision that
directed the NCUC to consider using a roll-in method. Utilities
Commission v. Edmisten, supra, 299 N.C. at 434. The Su-
preme Court noted that
while Nantahala’s contractual arrangements with TVA
and Tapoco may benefit Nantahala with a guarantee that
its minimal production capacity will be sustained during
adverse conditions, these same arrangements appear to
result in the anomalous situation that in periods of favor-
l By law the NCUC must ascertain the fair value of a utility’s “use
and useful” property and the utility’s reasonable operating expenses to
determine a cost of service, from which rates are calculated. N.C.G.S.
§ 62-133(b). The NCUC must consider “all other material facts of record”
which may have a significant bearing on the determination of reasonable and
just rates. N.C.G.S. § 62-133(d); Utilities Commission v. Edmisten, supra,
299 N.C. at 437. A “roll-in” method takes into account the fair value of
property and operating expenses other than that used by the utility in
generating electricity in North Carolina. For example, in calculating rates for
Duke Power and Carolina Power and Light, two utilities operating both in
North and South Carolina, the NCUC calculates the cost of service over the
utility’s entire, integrated system and apportions the cost between the two
states. The “roll-in” in the present case produces “a rate schedule computed
upon a rate base which takes into account the property values and operating
expenses of both Tapoco and Nantahala.” /d.
2la
able stream flow and rainfall in which Nantahala’s facili-
ties produce more energy than its customers require, these
customers must nevertheless pay extra for extra energy
purchased by Nantahala from TVA. Any usable excess
generated by Nantahala in such a year appears to accrue
not to the benefit of its customers, but rather to that of its
parent Alcoa, which “purchases” the remainder of the
New Fontana entitlements from Tapoco. Suffice it to say
that the assertion that Nantahala’s public is fairly served
by a contract requiring Nantahala to purchase additional
power regardless of the adequacy of its own generation
assaults the common sense of this Court. Nantahala’s
customers should not be denied the benefit of their
utility’s fairly regular harvests of abundant energy.
299 N.C. at 440-441.
On remand, the NCUC heard additional evidence, adopted
the roll-in methodology advocated by the intervenors and
entered an order reducing Nantahala’s rates and requiring a
refund to the Nantahala ratepayers for earlier years’ overpay-
ment. See Exhibit F to Jones Affidavit. In so ordering the
NCUC found that Nantahala and Tapoco constitute a single
integrated system, calculated the “fair value” of the entire
system, and determined what portion of the system is devoted
to intrastate retail electric service in North Carolina. Exhibit F
at 7-8. Rates were based on a cost of service calculated from
that apportionment. On May 4, 1982, the NCUC entered an
order requiring Nantahala and Alcoa to file a joint plan to
refund $18,962,000.00 plus accrued interest to the Nantahala
ratepayers no later than January 28, 1983. See Exhibit H to
Jones Affidavit. Alcoa was joined in the most recent refund
order because the NCUC had concluded that “Nantahala is
financially unable to make all of the refunds required. . . .”
Exhibit H at 3. Nantahala has appealed the rate and refund
orders to the North Carolina Court of Appeals.
During the lengthy course of the retail rate proceedings, the
New Fontana and apportionment agreements have also been
the a of proceedings before the Federal Energy Regula-
2
22a
tory Commission (FERC), the successor to the Federal Power
Commission. The FERC oversees the licensing of Tapoco’s and
Nantahala’s hydroelectric facilities under Part I of the Federal
.Power Act, 16 U.S.C. §§ 79la, ef seqg., and regulates the
transmission and sale of electric energy in interstate commerce
under Part II of the Act, 16 U.S.C. §§ 824, et seq. Nantahala
has three wholesale customers whose rates are governed by the
FERC, and in 1976 Nantahala applied to the FERC for a
wholesale rate increase. In 1978, two of these customers, the
Town of Highlands and the Haywood Electric Membership
Corporation, along with the Attorney General of North Caro-
lina, filed a complaint with the FERC alleging that Alcoa,
Nantahala and Tapoco “are in violation of the Federal Power
Act by diverting, for the benefit and private use of Alcoa,
hydroelectric power and facilities dedicated to public service.”
FERC Opinion No. 139, at 2; Exhibit D to Jones Affidavit.
The two proceedings were consolidated and the FERC, like the
NCUC, considered whether a roll-in method should be used to
determine Nantahala’s cost of service. The Town of Highlands
contended in the FERC proceedings that Nantahala and Ta-
poco should be treated as one entity for ratemaking purposes
and that the 1971 apportionment agreement should be set
aside, or in the alternative that the 1971 agreement should be
modified to remedy the misallocation of power caused by the
agreement. After a lengthy evidentiary proceeding the FERC
determined that
[bJased on the evidence presented, we cannot find that
Alcoa has used the separate corporate identities of Nanta-
hala and Tapoco to frustrate the purposes of the Federal
Power Act, or that the two companies operate as an
integrated system. Nantahala and Tapoco were developed
in different states and for different purposes; their cus-
tomer loads and sources of generation are geographically
separate; their management is separate; and they are
interconnected at only one point. The two companies do |
not constitute an integral unit between themselves but are
each a part of the coordinated TVA system, and it is TVA
23a
who controls and dispatches most of the generation from
their respective generating plants.
FERC Opinion No. 139 at 7 (footnotes omitted); Exhibit D to
Jones Affidavit. The FERC did conclude, however, that “the
alleged fairness of the 1971 Agreement is not supported by the
record,” and the 1971 agreement was modified “to provide
entitlements to Nantahala which will result in just and reason-
able rates to its wholesale customers.” Jd. at 11-12. Alcoa
assures this court that the FERC’s decision will be appealed to
the United States Courts of Appeals.
On January 26, 1982, while Nantahala’s exceptions to the
September 2, 1981 order of a three-member panel of the
NCUC were pending before the full NCUC, and while excep-
tions to the decision of the FERC’s administrative law judge
were pending before the FERC, Alcoa and Tapoco filed this
action in the United States District Court for the Eastern
District of Tennessee. On motion of the defendants Judge
Taylor of that court transferred the action to this court.
Plaintiffs contend here that the rate and refund orders of the
NCUC contravene both the Federal Power Act and the com-
merce clause, Article I, Section 8, of the United States Consti-
tution, arguing that.the FERC’s acceptance of the New
Fontana and apportionment agreements as the foundation for
determining Nantahala’s cost of power must be accepted also
by the NCUC in the retail ratemaking proceedings. Moreover,
it is contended that the NCUC orders have the effect of
shifting to Tapoco and Alcoa some portion of Nantahala’s cost
of service. The orders are thus contended to be attempts by the
NCUC to regulate wholesale, interstate power transactions and
are contended to have an impermissible adverse effect on
interstate commerce.
With this background in mind, the court can proceed to
determine the pending motions and will turn first to the
motions to intervene.
24a
MOTIONS TO INTERVENE
The United Steelworkers of America, the collective bargain-
ing agent for some 3,500 Alcoa employees working in the
Tennessee plant, and the State of Tennessee seek intervention
as parties plaintiff. Neither of the movants seek to add signifi-
cantly to the arguments of the present parties. Rather, they
wish to preserve their rights should the present positions of the
parties change and to apprise the court of the magnitude of the
economic interests at stake. The United Steelworkers point out
that its members may lose their jobs with Alcoa if the NCUC
rate and refund orders are enforced because Alcoa’s Tennessee
plant may become too costly to operate. Similarly, the State of
Tennessee as parens patrie seeks to protect the economic
well-being of its citizens, fearing the substantial adverse impact
which would result if a curtailment of production at Alcoa’s
Tennessee operations is caused by increased electric rates. The
State of Tennessee also wishes to assert its sovereign interest in
controlling the natural resources and economic activities within
its borders, which it contends have been unlawfully invaded by
the NCUC orders. Conversely, the Attorney General of North
Carolina seeks as amicus curiae to represent the interests of the
users and consumers of electric power in North Carolina who
stand to benefit from the NCUC orders.
If this court sat as an economic planning agency, the mov-
ants’ depictions of the many substantial secondary effects of
the orders in question would be of crucial significance. As
arbiter of the specific questions presented for decision, how-
ever, the court finds that the parties in their present postures
fully represent the interests of the movants, and the motions to
intervene will be denied. See F.R.Civ.P. 24(a). Instead, mov-
ants will be heard as amicus curiae. Should the present conten-
tions of the parties significantly change, the motions to
intervene may be renewed.
MOTION TO DISMISS
Defendants move to dismiss the action on five grounds.
They assert that the Johnson Act, 28 U.S.C. § 1342, and the
25a
Eleventh Amendment to the United States Constitution bar the
relief sought and therefore require dismissal. They contend
that the court does not have subject matter jurisdiction on any
of the jurisdictional grounds alleged. They argue that the
action should be dismissed for failure to join Nantahala, who
is asserted to be both the real party in interest and an indispen-
sable party, yet not subject to joinder without destroying
complete diversity, which defendants assert is the only basis for
subject matter jurisdiction. Finally, defendants contend that
even if the court has jurisdiction, it should abstain from
exercising that jurisdiction. These contentions will be ad-
dressed seriatim.
By enacting the Johnson Act in 1934, Congress “put statu-
tory limitations on the circumstances in which a federal court
could issue injunctions against state orders setting rates for
public utilities.” 17 Wright & Miller, Federal Practice and
Procedure § 4236, at 407 (1978). The Johnson Act does not,
however, prevent a federal court from enjoining a state utility
rate order if the court’s jurisdiction is invoked on some
grounds other than “diversity of citizenship or repugnance of
the order to the Federal Constitution.” 28 U.S.C. § 1342(1). In
addition, a federal court may intervene if the state rate order
interferes with interstate commerce. 28 U.S.C. § 1342(2).
Viewing the allegations of the complaint as true for purposes
of this motion, the court finds that the Johnson Act does not
bar the relief sought. Plaintiffs allege that the indirect effect of
the NCUC rate and refund orders is to interfere with the
interstate transactions between Nantahala, Tapoco, TVA and
Alcoa. It is further alleged that the orders in question invade
the exclusive regulatory jurisdiction of the FERC, a jurisdic-
tion which preempts any activity by the NCUC in the field.
While recognizing that “a rate issued by a proper state body
does not interfere with interstate commerce [within the mean-
ing of 28 U.S.C. § 1342(2)] unless it is directly burdensome or
otherwise discriminatory of the (sic) interstate traffic,” Ka-
linsky v. Long Island Lighting Company, 484 F.Supp. 176, 178
(E.D.N.Y. 1980), quoting New York Central Railroad Com-
pany v. Illinois Commerce Commission, 77 F.Supp. 520, 522
26a
(N.D.1ll. 1948), the court finds the allegations sufficient to
surmount the Johnson Act’s bar on “interstate commerce”
grounds. In addition, the alleged preemptive effect of the
Federal Power Act gives this court federal question jurisdic-
tion, so the condition established by 28 U.S.C. § 1342(1) is not
met.
Nor does the Eleventh Amendment bar this action. Defen-
dants attempt to stretch the recent Supreme Court decision in
Cory v. White, _._. U.S. ___., 50 U.S.L.W. 4621 (June 14,
1982), to encompass the present action, contending that Cory
holds that the Eleventh Amendment bars actions for injunctive
relief against state officers. Unlike the present case, however,
Cory (as viewed by the majority of the Court) involved no
claim that state officers were acting contrary to federal law.
The Cory opinion does not spawn any doubt concerning the
continuing vitality of Ex Parte Young, 209 U.S. 123 (1908),
which permits actions for injunctive relief against state officers
alleged to be acting contrary to federal law, as are defendants
here.
Also meritless is the contention that this court is without
subject matter jurisdiction. By alleging that defendants’ acts
contravene the commerce clause as well as preemptive federal
legislation, plaintiffs have brought this action within this
court’s federal question and commerce jurisdiction. 28 U.S.C.
§§ 1331, 1337. Thus diversity jurisdiction is not essential to the
maintenance of the action, so the question of whether Nanta-
hala is an indispensable party need not be reached for purposes
of addressing the jurisdictional motion, because joinder of
Nantahala would not divest the court of jurisdiction. Finding,
therefore, that it has jurisdiction over this action and that
Nantahala could be joined if necessary, the court must turn to
the serious questions raised by defendants’ assertion that the
court should abstain from exercising jurisdiction.
ABSTENTION
Defendants contend primarily that this action should be
dismissed for reasons of federal-state comity and point out
that: (1) federal courts have traditionally abstained from en-
27a
joining orders of state utility commissions, (2) there is cur-
rently a proceeding pending in the state appellate courts in
which plaintiffs have raised their federal claims, (3) the state
courts can give the relief sought as fully and effectively as can
this court, and (4) intrusion by this court would seriously
undermine the state’s ability to pursue its important interest in
regulating intrastate electric utility rates. In so arguing, plain-
tiffs invoke the principles enunciated in Burford v. Sun Oil
Company, 319 U.S. 315 (1943), Alabama Public Service Com-
mission v. Southern Railway Company, 341 U.S. 341 (1951),
and the series of “equitable restraint” cases which began with
Younger v. Harris, 401 U.S. 37 (1971).
As this court has previously noted,
abstaining and dismissing a case which clearly raises
seemingly meritorious constitutional questions is, and
should be, the exception and not the rule. Only when
more important countervailing principles are raised and a
jurisprudentially adequate state forum is provided should
the federal courts defer to their state counterparts. Very
simply, federal courts have a duty to exercise their juris-
diction unless circumscribed by distinct and coherent
limits.
Wall & Ochs, Inc. v. Hicks, 469 F.Supp. 873, 878 (E.D.N.C.
1979). See also Colorado River Water Conservation District v.
United States, 424 U.S. 800, 813-814 (1976). Abstention is
appropriate, however, when state judicial proceedings have
been initiated prior to substantive federal proceedings on the
merits, the state proceedings provide an adequate opportunity
to litigate the federal claims, and intrusion by the federal court
would seriously undermine the state’s ability to regulate its
internal affairs. Wall & Ochs, supra, 469 F.Supp. at 879.
Employing the same test, the Supreme Court recently held that
a federal court must abstain from considering constitutional
challenges to a pending state bar disciplinary proceeding where
the proceeding was judicial in nature, provided an adequate
opportunity to raise the constitutional challenges, and impli-
cated important state interests. Middlesex County Ethics Com-
28a
mittee v. Garden State Bar Association, _. U.S. —__., 50
U.S.L.W. 4712, 4714 (June 21, 1982).
In the present case it is beyond question that state judicial
proceedings are now underway in which plaintiffs’ federal
claims can be adjudicated. The NCUC, in its “Final Order
Overruling Exceptions and Giving Supplementary Conclu-
sions,” dated January 28, 1982 addressed the federal issues
raised here, and those questions are now before the North
Carolina Court of Appeals.’ See Exhibit G to Jones Affidavit.
Plaintiffs contend, however, that there can be no cognizable
state interest when the state’s action is repugnant to a preemp-
tive federal statutory scheme. Plaintiffs rely on /nternational
Brotherhood of Electrical Workers v. Public Service Commis-
sion of Nevada, 614 F.2d 206 (9th Cir. 1980), where the court
observed “in passing” that “[a] preemption claim alleges in
essence that Congress has determined that particular matters
are of national concern and should be administered by na-
tional, rather than local, institutions. If a preemption claim is
well-founded, therefore, Burford abstention cannot be appro-
priate.” Jd. at 212, n.1. In the present context, plaintiffs’
contention is unpersuasive. Many of the cases relied upon
arose in contexts where there were no pending state judicial
proceedings, so Younger principles were not discussed.’ In
those cases where state judicial proceedings were underway, the
conflict between state and federal law was a direct, facial
inconsistency between statutes. See Kennecott Corporation v.
Smith, 637 F.2d 181 (3d Cir. 1980); Empire, Inc. v. Ashcroft,
524 F.Supp. 898 (W.D.Mo. 1981). In each of these cases, state
2 In the same order the NCUC rejected the contention that it should
reserve the federal questions for decision by a federal court. Exhibit G to
Jones Affidavit at 5-6.
3 See Braniff International, Inc. v. Florida Public Service Commis-
sion, 576 F.2d 1100 (Sth Cir. 1978); Construction Aggregates Corporation v.
Rivera de Vicenty, 573 F.2d 86 (ist Cir. 1978); Hotel and Restaurant
Employees v. Danzinger, 536 F. Supp. 317 (D.N.J. 1982); Begay v. Kerr
McGee Corporation, 499 F.Supp. 1317 (D. Ariz. 1980); RCA del Caribe, Inc.
v. Silva Recio, 429 F.Supp. 651 (D.Puerto Rico 1976).
29a
statutes regulating tender offers directly conflicted with the
provisions of the federal Williams Act, 15 U.S.C. §§ 78m(d)-
(e) and 78n(d)-(f), and no factfinding was necessary to deter-
mine the preemption issue. Here, in contrast, no challenge is
made to state statutes or regulations. Consideration of the
federal questions instead would require detailed factfinding
concerning the indirect effects of the NCUC rate and refund
orders on interstate commerce, on the rates established by the
FERC, and on contracts filed with the FERC.
The orders here are unlike those in New England Power
Company v. New Hampshire, _. U.S. ____., 102 S.Ct. 1096
(Feb. 24, 1982), and Public Uti/ities Commission of Ohio v.
United Fuel Gas Company, 317 U.S. 456 (1943), where at-
tempts were made by states to control directly interstate trans-
actions in energy. The NCUC’s orders on their face do no more
than establish intrastate, retail rates for Nantahala using a
particular method of determining Nantahala’s cost of produc-
tion. Plaintiffs have offered and the court has found no
controlling authority for the proposition that the NCUC is
bound to accept in its independent regulatory bailiwick a rate
of purchasing electricity approved by the FERC as Nantahala’s
cost of service. This does not mean, however, that the NCUC’s
orders have not impermissibly interfered with interstate com-
merce or that they have not indirectly affected matters exclu-
sively within the FERC’s jurisdiction.
An additional argument raised by plaintiffs is that Younger
abstention does not apply in proceedings not initiated by the
state. This position, accepted by the Third Circuit, Johnson v.
Kelly, 583 F.2d 1242 (3d Cir. 1978); Hotel and Restaurant
Employees v. Danzinger, supra, strikes this court as an attempt
to unduly restrict the application of the policies underlying
Younger. Just as it does not matter whether proceedings are
“labeled civil, quasi-criminal, or criminal in nature,” Juidice v.
. Mail, 430 U.S. 327, 335 (1977), quoted in Middlesex County
Ethics Committee, supra, 50 U.S.L.W. at 4714 n.12, it should
not matter whether proceedings happen to be initiated by the
state or by a private plaintiff. The crucial question is “whether
federal court interference would unduly interfere with the
ay ee POT eter Se ee ee) eM aa en
30a
legitimate activities of the state.” Jd. Nevertheless, it is note-
worthy that while the state proceedings were commenced by
Nantahala’s application for a rate increase, Alcoa and Tapoco,
the plaintiffs here, were brought into the state proceedings by
order of the NCUC, See Exhibit F to Jones Affidavit, at 4.
For these reasons, the court has concluded that the motion
to dismiss on abstention grounds is well taken and must be
granted. An appropriate order will be entered.
/s/
F.T. DUPREE, JR.
United States District Judge
3la
APPENDIX E
STATE OF NORTH CAROLINA
UTILITIES COMMISSION
RALEIGH
Docket No. E-13, Sub 29 [Remanded]
BEFORE
THE NORTH CAROLINA UTILITIES COMMISSION
aad
In the Matter of Application of Nantahala Power and Light
Company for Authority to Adjust and Increase
Its Electric Rates and Charges
++
ORDER REDUCING RATES
AND REQUIRING REFUND
HEARD IN: The Commission Hearing Room, Dobbs Building,
430 North Salisbury Street, Raleigh, North Carolina
27602, March 31, 1981; April 1, 2, 3, 7, 8 and 9, 1981;
and May 18, 19, 20, 21, and 22, 1981
BEFORE: Commissioner Sarah Lindsay Tate, Presiding; and
Commissioners A. Hartwell Campbell and Douglas P.
Leary
APPEARANCES:
For Nantahala Power and Light Company:
tod Howison, Jr., and James E. Tucker, Suite 400,
Branch Banking and Trust Building, PO. Box 109, Ra-
leigh, North Carolina 27602
id <. bok ‘Pes A *
Th RiP ee a eey See ee oN 8 a OD Pa ie Se ee
32a
For Aluminum Company of America and Tapoco, Inc.:
Ronald D. Jones, David R. Poe, M. Reamy Ancarrow,
LeBoeuf, Lamb, Leiby & MacRae, 140 Broadway, New
York, New York 10005
For Cherokee, Graham, Jackson, and Swain Counties, North
Carolina; the Towns of Andrews, Dillsboro, Robbinsville,
and Sylva, North Carolina; Tribal Council of Eastern Band
of Cherokee Indians; and Henry J. Truett:
William T. Crisp, Robert W. Schwentker, Crisp, Smith,
Davis and Schwentker, P.O. Box 751, Raleigh, North
Carolina 27602
For the Town of Bryson City:
Joseph A. Pachnowski, P.0. Box 849, Bryson City, North
Carolina 28713
For the County of Swain:
Fred H. Moody, Jr., McKeever, Edwards, Davis & Hays,
P.A., Box 670, Bryson City, North Carolina 28713
For Intervenor Muriel Maney:
Larry Nestler, Western North Carolina Legal Services,
P.0. Box 546, Cherokee, North Carolina
For the Using and Consuming Public:
Richard L. Griffin, Attorney General, P.0. Box 629,
Raleigh, North Carolina 27602
Robert F. Page and Thomas K. Austin, Public Staff
North Carolina Utilities Commission, P.0. Box 991, Ra-
leigh, North Carolina 27602
>
BY THE PANEL: This proceeding is before the Commission
upon remand from the Supreme Court of North Carolina.
Utilities Commission v. Edmisten, Attorney General, 299 N.C.
432 (1980).
"J
e - * of
33a
Upon consideration of the testimony and exhibits presented
at the hearing and the entire record in this docket, the Com-
mission makes the following
FINDINGS OF FACT
1. Nantahala is a duly organized public utility company
under the laws of North Carolina, subject to the jurisdiction of
this Commission, and is holding a franchise to furnish electric
power in the western part of the State of North Carolina under
rates and service regulated by this Commission as provided in
Chapter 62 of the General Statutes.
2. Tapoco is a duly organized public utility and is domesti-
cated as such under the laws of North Carolina. It is subject t»
the jurisdiction of this Commission with respect to its retail
rates and electric service as provided in Chapter 62 of the
General Statutes.
3. Both Nantahala and Tapoco are wholly owned subsidi-
aries of Alcoa. Alcoa is a public utility pursuant to G.S.
62-3(23)c. and is subject to the jurisdiction of this Commission
with respect to retail ratemaking.
4. The Nantahala and Tapoco electric facilities constitute a
single, integrated electric system and are operated as such by,
and as a coordinated part of, the Tennessee Valley Authority
(TVA) system.
5. For purposes of setting the Applicant’s rates in this
proceeding the Nantahala and Tapoco systems should be
treated as one entity with respect to all matters affecting the
determination of the Applicant’s reasonable cost of service
applicable to its North Carolina retail operations.
6. The New Fontana Agreement (NFA), executed by TVA,
Alcoa, Nantahala, and Tapoco, and the resultant 1971 Appor-
tionment Agreement between Tapoco and Nantahala, have
resulted in substantial benefits to Alcoa to the significant
detriment of the customers of Nantahala.
34a
7. The methodology employed by the Intervenors in mak-
ing jurisdictional cost allocations and cost-of-service alloca-
tions is the most appropriate for use in this proceeding.
Consequently, each finding of fact appearing in this Order
which deals with the proper level of rate base, revenues, and
expenses has been determined based upon said methodology.
8. The reasonable original cost of the Nantahala-Tapoco
property used and useful in providing electric service to its
retail customers in North Carolina is $36,951,000. The reason-
able accumulated provision for depreciation is $18,202,000,
and the reasonable original cost less depreciation is
$18,749,000. »
9. The reasonable replacement cost of Nantahala’s prop-
erty used and useful in providing retail electric service in North
Carolina is $57,795,000.
10. The fair value of Nantahala-Tapoco’s utility plant used
and useful in providing electric service to its retail customers in
North Carolina should be derived from giving 40% weighting
to the original cost less depreciation of Nantahala-Tapoco’s
utility plant in service and 60% weighting to the trended
original cost less depreciation of Nantahala-Tapoco’s utility
plant. By this method, using the depreciated original cost of
$18,749,000 and the reasonable replacement cost of
$57,795,000, this Commission finds that the fair value of said
utility plant devoted to intrastate retail electric service in North
Carolina is $42,177,000. This fair value includes a reasonable
fair value increment of $23,428,000.
11. The reasonable allowance for working capital is
$1,113,000.
12. The fair value of Nantahala-Tapoco’s plant in service
used and useful in providing electric service to its retail cus-
tomers within the State of North Carolina of $42,177,000 plus
the reasonable allowance for working capital of $1,113,000 less
customer deposits of $188,000, yields a reasonable fair value of
Nantahala-Tapoco’s property in service to North Carolina ]
retail customers of $43,102,000. “
‘
:
35a
13. The approximate gross revenues for the test year, after
accounting and pro forma adjustments, under rates approved
by Commission Order of June 14, 1977, are $11,067,000.
14. The approximate level of test year operating expenses
under rates approved by Commission Order of June 14, 1977,
after accounting and pro forma adjustments, including taxes
and interest on customer deposits, is $8,322,000 which includes
an amount of $1,133,000 for actual investment currently con-
sumed through reasonable actual depreciation after annualiza-
tion to year-end levels.
15. The reasonable original cost capital structure for use
herein is as follows:
Item Percent
Debt 40.05
Common equity 37.00
Cost-free 22.95
Total 100.00
and when the fair value increment is added, the reasonable fair
value capital structure becomes:
Item Percent
Debt 18.28
Common equity 71.24
Cost-free 10.48
Total 100.00
16. The fair rate of return that Nantahala should have the
opportunity to earn on the fair value of its investment devoted
to its North Carolina retail operations is 4.20%.
17. The approximate annual level of revenues which Nanta-
hala should be authorized to collect through rates charged for
its sales of service, based upon the findings of fact set forth
hereinabove, is $9,032,000.
18. The rates and charges of Nantahala, based upon the
adjusted test year level of operations, under rates approved by
36a
Commission Order of June 14, 1977, are excessive to the extent
that said rates produce a level of revenue which is $2,035,000
($11,067 ,000-$9,032,000) greater than the Applicant’s revenue
requirement (cost of service). Thus, Nantahala should be
required to reduce said rates and charges in a manner so as to
achieve an annual gross revenue reduction of approximately
$2,035,000, based upon the adjusted test year level of opera-
tions.
19. Nantahala should be required to refund to its North
Carolina retail customers all revenue collected under the rates
approved by Commission Order issued June 14, 1977, to the
extent that said rates produced revenue in excess of the rates
approved herein. Said refund shall include revenues collected
under the Company’s base rate structure as well as through
operation of the purchased power adjustment formula plus
interest computed and compounded at the legal annual rate.
20. The purchased power adjustment clause is a just and
reasonable rate and a reasonable method by which Nantahala
can recover a part of its reasonable operating expense.
21. Alcoa has so dominated certain transactions and agree-
ments affecting its wholly owned subsidiary Nantahala that
Nantahala has been left but an empty shell, unable to act in its
own self interest, let alone in the interest of its public utility
customers in North Carolina. Therefore, this Commission is
compelled to order that, to the extent Nantahala is financially
unable to make the revenue refunds required in this Order,
Alcoa shall refund all or any portion of the aforementioned
revenue refunds that Nantahala is financially unable to make.
sd . * *
EVIDENCE AND CONCLUSIONS
FOR FINDINGS OF FACT NOS. 6 AND 7
The Commission, as previously discussed, has determined
for purposes of this proceeding that the Nantahala and Tapoco
systems should be treated as one entity. The Commission must
now determine the proper allocation methodology to be used
37a
in apportioning the combined revenues, expenses, and invest-
ment of the Nantahala-Tapoco system between that applicable
to said system’s North Carolina retail operations and that
applicable to said system’s operations over which this Commis-
sion has no jurisdiction.
Generally speaking, the allocation methodology that the
companies (Alcoa, Tapoco) would have the Commission adopt
for use herein is based in all material respects upon demand
and energy entitlements as described and set forth in the New
Fontana Agreement and the Tapoco-Nantahala Apportion-
ment Agreement; whereas, the allocation methodology that the
Intervenors would have the Commission adopt is based in all
material respects upon the assumption that the electric energy
requirements of the Nantahala-Tapoco combined system’s
North Carolina public load has first call on the total electric
energy output of the combined system, and to the extent that
said output exceeds the requirements of the North Carolina
public load, such excess will be available for sale and will be
purchased by Alcoa. The Commission will first address the
propriety or, perhaps more appropriately, the impropriety of
basing cost allocations on demand and energy entitlements as
contained in the New Fontana Agreement and the Tapoco-
Nantahala Apportionment Agreement.
There are a number of inequities to Nantahala that arise out
of both the New Fontana Agreement (hereafter NFA) and the
1971 Tapoco-Nantahala Apportionment Agreement (hereafter
Apportionment Agreement) that result in Alcoa’s receiving
concealed benefits. Because the inequities of the NFA are more
subtle and difficult to express than are those of the Apportion-
ment Agreement, we discuss the 1971 Apportionment Agree-
ment first.
A. Concealed Benefits of the Apportionment Agreement
(1) Quantity of Nantahala’s Production
Alcoa’s power consultant George Popovich devised the Ap-
portionment Agreement share for Nantahala at 360 million
kwh annually. Nine years earlier, Mr. Popovich had determined
Roe. 7 eee ee ne) ee nee eae
38a
that a considerably higher apportionment share would be
required for Nantahala. On May 14, 1962, in a memo to an
Alcoa executive, Mr. Popovich wrote:
“A. The Alcoa-NP&L Co. Contract of October 1954 as
verbally revised should guarantee that the annual energy
entitlements of NP&L Co. are 360 million Kwh (41,000
K w) primary and 79 million Kwh (9,000 Kw) interrupti-
»le. This is a benefit in that it gives NP&L Co. this
assured supply even in the event of future conditions of
stream flow which might be more adverse than that
experienced in the historical period of record. These
energy entitlements have been independently determined
by engineers employed by NP&L Co. Alcoa has checked
and accepted their determinations . . . .” (underlining
supplied) (Intervenors Popovich Rebuttal Cross-Examina-
tion Ex. 1, pp. 3-4)
The engineering study referred to by Mr. Popovich had been
made by Ebosco in the year 1960 and a copy of that study is
Item 4, A.G. Jontz Cross-Examination Exhibit 1 (original
hearing). That study states:
“(a) The primary energy capability under the most ad-
verse water conditions of record. This quantity was found
to be 360 million kilowatt hours per year.
“(b) The average energy that could be generated annually
by these hydroelectric plants. This quantity was found to
be 439 million kilowatt hours per year.”
We note that the 79,000,000 Kwh referred to by Mr. Pop-
ovich as interruptible is the difference between primary and
average energy referred to in the Ebasco study. (When the three
small Nantahala plants not included in the NFA return entitle-
ment from TVA are deducted, the 79,000,000 Kwh is reduced
to 66,000,000 Kwh.)
Based upon these established and known facts, after the
NFA was executed, in 1963 Alcoa entered into a written
agreement with Nantahala wherein Nantahala was apportioned
a certain share of the NFA return entitiements. This agree-
39a
ment, identified as Item 35, Truett, et al., Judicial Notice Ex. 1
(original hearing), and also Applicant’s Exhibit WM/J-RIl,
apportioned to Nantahala 360,000,000 Kwh minimum plus
actual production in excess of 360,000,000 Kwh, that is, an
average of 426,000,000 Kwh annually (360,000,000 Kwh +
66,000,000 Kwh), using this language:
“2. Nantahala should be entitled each month to an
amount of energy which when added to its generation at
plants not operated under the above mentioned agreement
of December 27, 1962, shall be the equivalent either to its
total actual generation during that month or to the one-
twelfth of its annual primary generating capability which-
ever shall be the greater. The annual primary generating
capability of Nantahala as used in the foregoing sentence
is agreed to be 360 million kilowatt hours.”
By this agreement, Nantahala received annually the average
of 426,000,000 Kwh, of which 360,000,000 Kwh was guaran-
teed as a minimum.
During the remanded hearings, Intervenors put on similar
independent evidence from their expert witness Springs. Wit-
ness Springs testified, at Vol. 15, Tr. p. 33:
“. . . NP&L’s contributions, excluding the three small
projects not turned over to TVA, are approximately. . .
426,000,000 Kwh of average energy (Ebasco Study). . .”
Despite all of the above facts, when Mr. Popovich devised
the 1971 Apportionment Agreement, Nantahala received only
360,000,000 Kwh annually. Nantahala was deprived of an
average of 66,000,000 kwh annually. The detriment to Nanta-
hala constitutes a benefit to Tapoco that is passed on to Alcoa.
Witness Springs testified that “NP&L did not come out very
well in this ‘trade’ ” (Vol. 15, Tr. p. 19)
(2) Quantity of Nantahala’s Peaking Capacity
As one aspect of the 1971 Apportionment Agreement, Nan-
tahala has a limitation placed upon its peaking capacity of
wee s. :
‘ eee el ere * 7 Sao"? ~ > —— ae ee. ee ee
Fo
customer demand in excess of 54,300 Kw, it must pay a
monthly demand charge to TVA for all power over that
limitation. If the limitation were at a higher level, of 81,800
kilowatts, a monthly demand charge would be saved for 27,500
kilowatts, i.e., the difference between 81,800 Kw and 54,300
Kw, when customer demand equalled or exceeded the 81,800
kilowatt level.
Demand costs imposed on: Nantahala for use of capacity
between its assigned capacity of 54,300 kilowatts and its actual
capacity, of 81,800 kilowatts, would represent an expense to
Nantahala and, thus, a savings to its New Fontana Agreement
sister, Tapoco, since the capacity constraints for the TVA
return entitlements are jointly shared by them under the New
rontana Agreement. Tapoco’s savings are passed on to Alcoa
so as to become Alcoa savings, i.e., a concealed benefit.
The record clearly and convincingly establishes that Nanta-
hala’s correct capacity is 81,800 kilowatts and that, by being
assigned a demand limitation of only 54,300 kilowatts, Nanta-
haia suffers significant monthly financial loss.
The 1960 Ebasco Study (Item 4, A.G. Jontz Cross-Exam Ex.
1, Table A-1, (original hearing)), undertaken for Nantahala by
independent experts, computed Nantahala’s plant capacity,
under the most adverse water conditions, at 85,400 kilowatts.
After deducting the three small plants excluded from the NFA,
that capacity is 84,300 kilowatts (Vol. 15, pp. 147-148). The
Ebasco study computation is confirmed in an old memoran-
dum of W.T. Walker (Intervenors’ Ex. DAS-18, pp. 4-5 of 8),
Nantahala’s president, wherein he notes that in 1965 another
independent source had analyzed Nantahala’s allowed capacity
under the original Fontana Agreement to be only 35,172
kilowatts. Not only was the allowed capacity under the original
Fontana Agreement regarded as unrealistic, but a capacity
much higher than 54,300 Kw was thought to be proper. The
Walker memorandum states:
“. . . He thought this allocated capacity to be unreason-
able for a company with 84.3 Mw of co-ordinated capac-
ity under adverse water conditions, so he allocated 74.9
Mw to Nantahala. . .”
4la
The Walker memorandum continues, at page 5 of 8, by even
noting that “George Popovich’s proposed allocation to Nanta-
hala. . .” for capacity would be 76,000 Kw.
Based upon these established facts, after the NFA was
executed, Alcoa entered a written agreement with Nantahala in
the year 1963 wherein Nantahala was allowed to use capacity
without limitation. This agreement, mentioned in the previous
section, identified as Item 35, Truett, et al., Judicial Notice Ex.
1 (original hearing) and also Applicant’s Ex. WMJ-RIl, thereby
permitted Nantahala to use actual capacity to the limits as-
signed by the 1960 Ebasco study.
Intervenors’ witness Springs testified that after adjustment
for reserves, the allowable capacity of 84,300 kilowatts, under
most adverse water conditions, should be 81,800 kilowatts
(Vol. 15, Tr. p. 37).
Despite these impressive studies and facts, when Mr. Pop-
ovich accomplished his study (Intervenors’ Ex. DAS-12) for
the 1971 Apportionment Agreement, while accepting the most
adverse water capacity factor of 84,300 kilowatts, he deducted
27,500 kilowatts for the “largest unit out” to reach an assigned
capacity of 54,300 Kw. This deduction is for the Nantahala
facility which forms upwards of 50% of the entire Nantahala
generation system of 11 dams.
If Nantahala were a separate and independent system, a
deduction of the “largest unit out” might be appropriate to
determine assured capacity. However, Nantahala is not and
never has been a separate electric system—it was not so
designed. Nantahala’s two largest facilities are Thorpe (pre-
vious Glenville), completed in 1941 with 21,600 Kw capacity,
and Nantahala, completed in 1942 with 43,200 Kw capacity
(See Intervenors’ Ex. DAS-1, p. 8 of 14). The Thorpe and
Nantahala facilities comprise about 65% of Nantahala’s entire
system. At the time of their construction, Alcoa obtained a
certificate of necessity from the War Department and expressly
argued and avowed that they were part of the Alcoa system.
Intervenors’ Ex. DAS-7, p. 5 of 11; also being Applicant’s Ex.
WM4J-RS. In that exhibit, at pp. 5-6 of 11, it is recorded that
Alcoa said of these two Nantahala plants:
ae
“At the present time, Alcoa receives power from three
dams located on tributary waters of the Tennessee River
at Calderwood, Tennessee and Tapoco, North Carolina,
(Cheoah and Santeetlah developments). . . .
“To improve the present power situation and to supply a
portion of the 200,000 additional Kw required for na-
tional defense purposes, applicant proposes to build two
new developments, also on tributaries of the Tennessee
River, at Glenville and Nantahala, North Carolina. . .
The estimated total addition to the Alcoa power system is
51,500 Kw, part of which will be produced at the new
developments and part from additional water released for
us downstream.” (emphasis added) (Apparently, the two
new projects were finally designed for their actual greater
combined capacity, 64,800 Kw.)
Furthermore, for the past 40 years, both Nantahala and
Tapoco have been operated as an integral part of the TVA
electric syster’ »ursuant to the provisions of the Fontana and
New Fontana Agreements. Moreover, when Alcoa negotiated
these agreements with TVA, it did not bargain for return power
from TVA as if Nantahala was an independent power system
but rather the attributes of the Alcoa system were melded
together with the TVA system for evaluation purposes. In this
regard, Intervenors’ Ex. DAS-23 is a memorandum of Alcoa’s
meetings with TVA respecting negotiations for the NFA whe-
rein the TVA proposals were based on integration into and
coordination with the TVA system (Intervenors’ Ex. DAS-23,
pp. 6-7 of 85).
With Nantahala and Tapoco being thus integrated into and
coordinated with the TVA system, it is not appropriate to
determine Nantahala’s assured capacity by configuring Nanta-
hala as a single independent and isolated system and to use the
“largest unit out” methodology. Instead, Nantahala should be
treated as part of the TVA system and the reserve margin used
by TVA should be applied. TVA does not use a reserve of
“largest unit out” but rather uses “the loss of load probability
method.” (See Intervenors’ Ex. DAS-13, p. 1 of 3). Due to the
42a
~
43a
favorable operating characteristics of a hydro system as op-
posed to a steam system, those characteristics being, for
instance, low operating speeds, ruggedly constructed equip-
ment, and restarting capability without auxiliary power, the
reserve requirements of a hydro system are very low. Inter-
venors’ Ex. DAS-17, being a portion of the 1980 contract of
the Southern Company Services Intercompany Interchange, at
page 6 of 6, shows that a 3% hydro reserve is proper.
Using a 3% reserve in place of the “largest unit out” reserve,
in this case upwards of 50%, would establish a capacity under
most adverse water conditions of 81,800 kilowatts as opposed
to Mr. Popovich’s calculation of 54,300 kilowatts. This is what
Intervenors’ witness Springs testified the calculation should be
(Vol. 15, Tr. p. 37).
Significant cost is shifted to Nantahala by the unfair and
unwarranted limitation of capacity to 54,300 kilowatts. Con-
versely, that expense, in the form of demand charges paid to
TVA, is a concealed benefit to Alcoa.
(3) Nantahala’s Upstream Benefits
Nantahala’s projects are upstream of Tapoco’s projects,
except Santeetlali. As a consequence, water that is stored by
Nantahala can be released to flow downstream and be used by
Tapoco for production of electricity. Therefore, Nantahala’s
storage has a value to Tapoco. Granted TVA’s Fontana project
now lies between the Nantahala and Tapoco projects. How-
ever, that does not diminish the value of Nantahala’s stored
water to Tapoco since, when Nantahala releases water, that
water, or its equivalent, can be released by Fontana so as to
flow through to Tapoco.
On January 10, 1941, before Fontana was constructed and
even before the Fontana Agreement, Nantahala applied to the
War Department for a certificate to build the Glenville (now
Thorpe) and Nantahala projects, noting that they would be
upstream of the Calderwood and Cheoah dams. That applica-
tion, Intervenors’ Ex. DAS-7, at p. 5 of 11, in part, makes this
statement about the upstream benefits:
44a
“. . . It is contemplated that they will store water the
winter months, and will be used in the dry season to
produce additional power and also to make available
additional water for the developments downstream. . .”
A 1956 TVA study estimated the upstream storage benefits
of the two major Nantahala projects to Tapoco’s downstream
facilities. As shown by Intervenors’ Ex. DAS-9, the Nantahala
and Thorpe projects yield a continuous relative contribution to
Tapoco’s Calderwood and Cheoah projects of 4,300 Kw. This
is the equivalent of 37,668,000 Kwh annually as an upstream
benefit from Nantahala to Tapoco (4,300 x 8,760).
Despite the presence of Nantahala’s upstream benefits to
Tapoco, when Mr. Popovich devised the 1971 Apportionment
Agreement, Nantahala received no credit for this benefit. Of
course, the benefit accrued to Tapoco who passed the con-
cealed benefit on to Alcoa.
(4) Nantahala’s Entitlement for Operating Its Properties in
Accordance with the Fontana Agreement
By the 1941 Fontana Agreement, Nantahala, at the instance
of Alcoa, gave to TVA the right, in perpetuity, to control the
storage and flow of water from its several hydroelectric pro-
jects. (See, Item 8, A.G. Popovich Cross-Examination Ex. 3
(original hearing)). Respecting the value of this right, the
Fontana Agreement, at page 3, in part, states:
“Whereas, the most efficient and economical operation of
the hydroelectric plants on the Tennessee River and the
Little Tennessee River and their tributaries requires the
closely coordinated operation of the system of Authority
(sic, TVA) with Company’s (sic, Nantahala & Tapoco)
plants, and such coordinated operation will make possible
substantial benefits and economies; and
“Whereas, operation under the provisions of this agree-
ment will aid in the control of floods, the promotion of
navigation, and the conservation of stored water; and
45a
Unquestionably, Nantahala’s giving up of rights constituted
a loss of considerable value for which loss Nantahala has been
entitled to compensation.
With the 1963 apportionment agreement between Alcoa and
Nantahala (Item 35, Truett, et al., Judicial Notice Ex. 1
(original hearing), being also Exhibit WMJ-RIl), Alcoa agreed
to continue to pay to Nantahala monies for Nantahala’s loss of
those operational rights. Moreover, the agreement clearly
stated that TVA was continuing to pay value for those rights,
which value is reflected in the TVA return entitlement of the
New Fontana Agreement. The 1963 Alcoa-Nantahala Appor-
tionment Agreement at pages 1-2, in part, states:
“Whereas, the agreement dated August 14, 1941, known
as the ‘Fontana Agreement’ has been superseded in cer-
tain respects by a new agreement dated December 27,
1962; and
“Whereas, heretofore Nantahala has received certain pay-
ments which represented payments to Nantahala from
operating its properties in accordance with the terms of
the Fontana Agreement; and
“Whereas, the above-mentioned agreement of December
27, 1962, (sic, NFA) was entered with the understanding
among Nantahala, Alcoa and Tapoco, Inc. (a) that the
benefits accruing to Nantahala thereunder would include
the right to continue to receive payments equal in amount
to the above-mentioned payments. . .”
“Now, therefore, it is agreed that during the term of the
above-mentioned agreement of December 27, 1962:
“1. Alcoa shall pay Nantahala in monthly installments
the sum of $89,200 per annum, which amount shall be in
addition to the amounts otherwise paid by. Alcoa to
Nantahala for energy under such power purchase contract
as shall be in effect from time to time.”
Intervenors’ witness Springs testifying on another aspect of
this case, used language that is most appropriate to explain this
matter:
46a
“. . . Thus, the Original Fontana Agreement still con-
tinues to confer significant benefits on Alcoa. . .” (Vol.
15, Tr. p. 27).
In the year 1963, in Docket No: E-13, Sub 13, the North
Carolina Utilities Commission found the following facts con-
cerning the TVA return entitlement as including a reimburse-
ment to Nantahala. In Item 36, Applicant’s Judicial Notice
Exhibit (original hearing), at page 8, the Commission stated:
“. . . The Evidence offered by Nantahala further dis-
closed that Nantahala operates under a working agree-
ment between its parent, Alcoa, and TVA (the Fontana
Agreement), wherein TVA exercises control of water re-
lease in the Nantahala generating system. For this privi-
lege, TVA delivers to Alcoa approximately 25,600,000
Kwh at 100 percent load factor (compensation power) for
the credit of Nantahala. . .”
At page 8, the Commission further stated:
“7. Alcoa pays Nantahala for TVA’s control of the release
of water in Nantahala’s generating system at the rate of
3.5 mills per Kwh, based on 25,600,000 Kwh annually.
This payment is below the rate paid by Alcoa to Nanta-
hala for firm power.” w
Despite the fact that the NFA includes in the TVA return
entitlement a reimbursement by TVA for the right to operate
Nantahala’s projects for which Alcoa previously paid $89,200
annually to Nantahala, when Mr. Popovich devised the 1971
Apportionment Agreement he gave no credit to Nantahala for
that entitlement.
Under the terms of the 1971 Apportionment Agreement,
Nantahala receives neither an energy credit nor a monetary
payment for the right given up. Naturally, since the TVA
payment for the operational rights, which is paid with energy
in the NFA rate entitlement, did not go to Nantahala, it inured
to the benefit of Tapoco. In turn, Tapoco passes this concealed
benefit to Alcoa. (It should be noted that 3.5 mills has, for
47a
many years, constituted far less than the present value of
electric energy.)
(5) Nantahala’s Value to the TVA Interconnected System
Another failure of the Apportionment Agreement respecting
Nantahala’s participation is that the Popovich formula does
not consider the proper value to Nantahala of the fact that the
Nantahala, Tapoco, and TVA systems are interconnected. In-
terconnection is of considerable value to TVA completely aside
from the fact that Nantahala’s rate base includes in it certain
assets devoted to the interconnection, which assets are entitled
to earn a rate of return. Because Nantahala is not an isolated
system, it should be receiving the usual benefits that accrue
from coordinated operation. Yet, Nantahala does not receive
the usual benefits of an interconnected and coordinated sys-
tem.
Intervenors’ Exhibit DAS-23 consists of many pages of
Alcoa memoranda reflecting the path of negotiation between
Alcoa and TVA for the New Fontana Agreement. While there
are several references to the matter of interconnection, we refer
only to a few which illustrate that interconnection has consid-
erable value. At page 28 of 85, one memorandum says:
“. . . Copies of our studies were given to TVA and they
showed that the new TVA proposal could be supplied
from our present system without any apparent considera-
tion given to gains that TVA will realize from integration
and the peaking capacity on our system.
“As mentioned above, TVA will check our studies on their
own computer and if these studies are confirmed, we will
have immediate discussions in an effort to determine what
studies should be made to properly determine the benefits
of integration, use of our peaking, etc. . .”
&
Again, on page 30 of 85, Intervenors’ Exhibit DAS-23, an
Alcoa memorandum states: a3
48a
“II. We do not believe present TVA proposal equitable
because:
a. Our system will alone produce the TVA proposal. .
We argued, however, that TVA could realize advantages of
integration, peaking, etc., and still provide their proposal
to us from our system.”
Again, on page 34 of 85 of Intervenors’ Exhibit DAS-23,
another Alcoa memorandum states:
“There is a strong feeling among the Engineering Depart-
ment, particularly Messers. Gnuse, Tompkins, Eagleton,
Popovich and others, that the value to TVA of integrated
operation is much greater in 1960 than it was in 1941 at
the time the contract was negotiated. They have argued
that because of this, TVA should be willing to renegotiate
the entire Fontana Agreement recognizing the present
inequities. . . .”
Of course, during further negotiations, Alcoa was able to
derive considerable gain from TVA for the integrated systems
factor. We have previously mentioned certain benefits of a
coordinated, integrated operation, such as the need for smaller
reserves and, in this case, that TVA actually controls produc-
tion of generation and storage waters.
However, we have not mentioned the value in integration of
Nantahala’s projects that are upstream of TVA’s Fontana
Project. In an integrated system such value is maximized. Since
the Fontana Project is located below Nantahala’s projects (See
Intervenors’ Ex. DAS-3) and above the Tapoco projects, other
than Santeetlah, the Fontana Project receives the benefit of the
storage capability of the Nantahala projects. Indeed, the TVA
Tennessee River system receives the benefit of the storage of all
of these projects located on the Little Tennessee River System.
This is especially true since, under the New Fontana Agree-
ment, TVA has control of all of these reservoirs on the Little
Tennessee River system, except the three small projects of
Nantahala which are not included. Intervenors’ Ex. DAS-9
shows the results of a TVA study of downstream storage
a.
3
o
a
~
?
a
. a
ef
49a
benefits. According to this study, the Nantahala and Thorpe
units alone added 12,400 Kw of continuous primary power to
the TVA system. This is equal to 108,624,000 Kwh per year
(12,400 x 8,760 hours) (Vol. 15, Springs pp. 48-49). We have
already considered that the upstream Nantahala and Thorpe
projects yield a continuous relative contribution to Tapoco’s
Calderwood and Cheoah projects of 4,300 Kw, which is
37,668,000 Kwh annually. This benefit to Tapoco should be
deducted from Nantahala’s total upstream benefit of
108,624,000 Kwh in order to obtain Nantahala’s upstream
benefit to TVA. After deduction, Nantahala’s annual upstream
benefit to TVA is calculated to be 70,956,000 Kwh.
Examination of the NFA reveals that the parties cancelled
out their respective upstream benefits when that bargain was
struck. Since Nantahala provided benefits upstream to both
TVA and Tapoco, and TVA provided benefits upstream to
Tapoco, it was Tapoco which gained by that mutual cancel-
lation. Certainly, Nantahala lost the benefit of the value of
70,956,000 Kwh annually. Surely, Nantahala should receive in a
joint agreement with TVA the benefit of that integrated up-
stream storage.
When the 1971 Apportionment Agreement was entered into
between Tapoco and Nantahala, Tapoco should have been
willing for Nantahala to have an additional 70,956,000 Kwh
annually assigned to it as the value of integrated storage, but
when Mr. Popovich devised the apportionment formula Nanta-
hala got no such benefit. As a consequence, to Tapoco’s
benefit, Nantahala was deprived of one value of the intercon-
nection with the TVA system. This concealed benefit flowing
from Nantahala to Tapoco is, of course, passed on by Tapoco
to Alcoa.
(6) Summary of Detriment to Nantahala from the 1971 Ap-
portionment Agreement
By the 1971 Apportionment Agreement, Nantanala was
given no credit for the following:
50a
1. Average production in excess
of primary production 66,000,000 Kwh annually
Benefits upstream of Tapoco 37,668,000 Kwh annually
3. Entitlement for operating
properties under Fontana
Agreement 25,600,000 Kwh annually
4. Value to TVA of the
interconnected system 70,956,000 Kwh annually
200,224,000 Kwh annually
In addition, Nantahala received no credit for its peaking
capacity of 27,500 kilowatts over the 54,300 kilowatts assigned
to it, for which Nantahala must pay demand charges to TVA
when monthly demand exceeds assigned capacity.
The North Carolina Supreme Court, in Edmisten, supra, at
pages 440-441, when considering just the failure of Nantahala
to receive benefit for its average production, stated:
“. . . Suffice it to say that the assertion that Nantahala’s
public is fairly served by a contract requiring Nantahala
to purchase additional power regardless of the adequacy
of its own generation assaults the common sense of this
Court. . .” (emphasis added)
Now that considerably more of the various detriments to
Nantahala have been exposed and fleshed out, it is apparent
that the 1971 Apportionment Agreement works an extensive
injustice on Nantzhala and its public ratepayers, the gravity of
which far exceeds even that envisioned by the Supreme Court.
B. Concealed Benefits of the New Fontana Agreement
The concealed benefits flowing from Nantahala to Alcoa by
virtue of the New Fontana Agreement are entirely different
from those previously discussed which flow from the 1971
Tapoco-Nantahala Apportionment Agreement. The basic in-
equity to Nantahala arising out of the NFA is that the energy
entitlement returned to Nantahala and Tapoco from TVA is
structured to meet Alcoa’s demand for a certain amount of
}]
~~
=!
Sla
stable electricity for purposes of aluminum production rather
than a demand for a public load. Consequently, the NFA
returns an average of 218,300 kilowatts of energy at a high
load factor with minimal peaking deviation, which load is
principally designed to service Alcoa’s pot-lines and other
production electrical requirements. Even the interruptible and
curtailable energy entitlement returned to Tapoco-Nantahala is
in increments of wattage that conform to the demands of a
pot-line so that, if power is interrupted or curtailed, Alcoa can
respond by cutting out a particular pot-line.
Nantahala, on the other hand, has a fluctuating demand for
energy which has peaks and valleys. This is typical of a public
service load. Nantahala’s electrical requirement is for assured,
but constantly, variable amounts. Nantahala needs peaking
capacity and its generation projects possess peaking capacity,
yet the NFA traded away that peaking capacity to TVA. The
Intervenors urge that it would be ridiculous, as a result of
enlightened, arm’s-length bargaining, to turn over Nantahala’s
peaking capacity to TVA and then, at such time as its load
requires peaking capacity, to buy that same capacity back from
TVA at a very high price. The Commission agrees that the
detriment resulting to Nantahala from the design of NFA flows
to Alcoa as a benefit.
Intervenors’ witness Springs testified as to the details of
Alcoa’s concealed benefits derived under the NFA (Vol. 15, Tr.
pp. 39-46). He showed that Alcoa reaped enormous benefits
through the improvement of the availability of Tapoco’s sec-
ondary energy production from a level of 42% average curtail-
ment to an average curtailment rate of only 8% (Vol. 15, Tr.
pp. 39-40).
He also showed that the Tapoco generation statistics reflect
the coordination of the Fontana Project and other forms of
integration with TVA, which are inconsistent with the isolated
system model utilized as the basis for the 1971 apportionment
study (Vol. 15, Tr. pp. 43-44). As stated in a memorandum by
George Popovich contemporaneously with the negotiation of
the NFA:
i 7
52a
“It is my opinion that, to Alcoa, the present proposal (sic,
NFA) represents an improvement over the existing Fon-
tana Agreement. In day years this improvement could be
substantial. . .” (Ex. DAS 23, p. 59 of 85)
Alcoa was in direct control of the negotiations, and, unlike
the Nantahala ratepayers, has had every ability to protect its
own interests during the negotiations (Vol. 15, Tr. p. 46-47).
Respondents cannot now be heard to claim that they are
dissatisfied with the NFA so as to place the cost responsibility
for the deficiencies of that agreement upon Nantahala’s rate-
payers.
One reason the NFA may have been designed so exclusively
to meet Alcoa’s needs, to Nantahala’s detriment, was because
when the NFA negotiations were underway, the parties contem-
plated the sale of Nantahala’s distribution system to Duke. By
the sale to Duke, Nantahala would have been left with its
generation but would have been without a public service load.
Nantahala would then have taken its NFA entitlement and
delivered it all to Alcoa. Accordingly, the power Nantahala
would have gotten under the NFA would have been satisfactory
for delivery to Alcoa irrespective of quantity and design.
A sale of Nantahala’s distribution system to Duke had been
approved by the North Carolina Utilities Commission and the
approval Order, in turn, had been approved by the Superior
Court. It was not until the year 1963 that the Supreme Court
stopped the sale, which date was after the New Fontana
Agreement had been executed. See Utilities Commission v.
Membership Corp., 260 N.C. 59, 131 SE2d 865 (1963). Prior
to the Supreme Court’s action, Alcoa personnel had believed
that the sale to Duke was to be approved. Thus, in an Alcoa
memorandum dated May 27, 1960, being Intervenors’ Ex.
DAS-23, p. 2 of 85, it is recorded:
“. . . They (sic TVA) asked us the status of the sale of
Nantahala to Duke. We tald them that the matter was at a
standstill at the present time but we were continuing our
efforts to complete the transaction and we expected that
53a
the sale would take place perhaps within the next year
In a memorandum of August 23, 1960, being page 15 of 85
of Intervenors’ Ex. DAS-23, it is stated:
“One final note, the entire TVA proposal is based upon
the sale of the Nantahala Power Company. TVA proposed
that if the sale was not complete at the time this new
proposed contract becomes effective, they would increase
the power available to us under the purchase contract to
whatever amount is necessary for us to handle the Nanta-
hala peak. This would be done on a temporary basis and
would be reduced concurrent with the transfer of the
Nantahala properties to Duke.”
In another memorandum of November 6, 1962, being Inter-
venors’ Ex. DAS-23, p. 83 of 85, which is the final memoran-
dum after completion of all negotiations for the NFA, the
following is written:
“. . . In my opinion it will be preferable for us to sell the
Mission Plant to TVA whenever we transfer the Nantahala
properties t
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.