Cooperative’s PPA Lawsuit Against G&T Remanded

A federal appellate court recently addressed a distribution cooperative’s lawsuit against a G&T cooperative with which it had a power purchase agreement.  Though the lawsuit alleged the G&T cooperative breached the PPA, the latest ruling focused on whether federal courts have jurisdiction to hear the claim.  Ultimately, the courts concluded that the claim belonged in state court, as it did not involve a question of federal law.   

Background

In 1997, the parties entered into a wholesale power all-requirements contract through which G&T Cooperative agreed to supply power to Distribution Cooperative.  Under the PPA, Distribution Cooperative was required to pay the rates set by G&T Cooperative, but the rates must be “approved by the applicable regulatory authorities and the Administrator of the Rural Electrification Administration.”

Before 2004, G&T Cooperative was considering whether to repay its RUS debt early, which would cause it to become subject to the exclusive regulatory jurisdiction of FERC.  Distribution Cooperative wrote a letter to G&T Cooperative stating it felt such action would constitute a breach of the PPA.  It argued that because the PPA specifically mentioned the state’s public utility commission, it expressed an intent by the parties to avoid FERC jurisdiction over the PPA.  G&T Cooperative ultimately decided to move forward with the plan, and it filed a rate schedule with FERC.

G&T Cooperative then filed a declaratory judgment action with FERC, seeking verification that it was subject to FERC’s jurisdiction.  Distribution Cooperative raised an argument that, by filing a rate schedule with FERC, G&T Cooperative was in breach of the PPA.  FERC concluded that it had exclusive jurisdiction over G&T Cooperative’s Tariff, but it declined to rule on the breach-of-contract question.

In response to FERC’s order, Distribution Cooperative filed a breach-of-contract lawsuit against G&T Cooperative in state court.  G&T Cooperative removed the lawsuit to federal court, based on its argument that the matter was a question of federal law.  Distribution Cooperative disagreed and moved to remand the lawsuit back to state court, arguing the matter was not an issue of federal law.  On the issue of jurisdiction, the federal court ruled in favor of G&T Cooperative, and Distribution Cooperative appealed to a federal appellate court.

Analysis

The key issue before the court was whether Distribution Cooperative’s lawsuit was based on federal or state law.  If based on federal law, the case belonged in federal court.  If not, it belonged back in state court.

G&T Cooperative argued that (i) the filing of a rate schedule with FERC makes the claim subject to federal jurisdiction, and (ii) the Federal Power Act’s jurisdiction provision provides for exclusive jurisdiction in federal courts for lawsuits arising out of the FPA.

On the first point, the court held the G&T Cooperative’s filing with FERC does not necessarily render all claims subject to federal court jurisdiction.  While the existence of a tariff would normally indicate federal court jurisdiction, this case was different – because the PPA and the claim existed before the rate schedule even existed or was filed with FERC.  Consistent with prior cases, where a contract existed and its breach occurred before the federal tariff, the complaint based on such breach does not present a question of federal law.

On the second point, the court held the FPA’s jurisdiction provision does not make this case a federal question.  The FPA does not entirely preempt state law.

The provision provides the federal district courts with exclusive original jurisdiction only over suits to enforce liabilities or duties created under the FPA.  If the liability or duty at issue is not created by the FPA, it does not fall within the exclusive jurisdiction provision. Absent a showing of Congressional intent to preempt all state law claims in the area of wholesale power regulation, there is no complete preemption.

Here, the court found no intent to completely preempt state law claims.  The court had previously discussed the exception for electric cooperatives with RUS debt.  Such entities are potentially subject to state court regulation.  In addition, the court specifically found that Distribution Cooperative’s claim was not a claim arising out the FPA.  Thus, the federal district court should have remanded the case back to state court.

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